Health FSA forfeitures

[Guest larosen322]

We had forfeitures from our health FSA last year which exceeded our administrative costs. I would like to return the forfeitures to participants as taxable cash. Do I have to include participants who are no longer employed with us? If so, how do I treat the payment (subject to FICA, 1099 nonemployee compensation, etc.)?

Thank you.

[g8r]

If you were to give a distribution to everyone in the plan, it would be w-2 wages and I'd do everything to show that it's a bonus.

The problem is the DOL technical release 92-01 (I think that's the correct cite) stated that even though you don't have to set up a trust, the amounts are still plan assets. Paying these for anything other than medical expenses or administrative costs could raise some issues.

Of course this gets very gray where the assets are commingled with employer assets. It's difficult to trace where the funds went.

One option might be for the employer to make an amount available in the FSA for everyone next year. There are other options. I just wanted to point out that there are some issues for you to consider.

[Kirk Maldonado]

There are also some restrictions in the 125 plan regs that limit the way in which you can allocate these experience gains.