Employer contributions to FSAs

[Guest PatrickA]

Our employer has indicated a desire to contribute $400 to this year's FSA accounts for all employees. If the employee did not elect to participate in an FSA he would establish an account for the employee with this money. I don't believe that such a mid-year contribution to a calendar year plan is allowed, but am not able to find the language I need to convince him.

[Guest JerseyGirl]

I agree with you that this is not a qualified event. Check this link; among other things it lists the events that must take place to allow a change of election – in layman’s terms and footnoted to the pertinent sections of the code.

http://www.irs.gov/pub/irs-utl/intro_to_ca...a_plans_doc.pdf

[QDROphile]

While it is true that the employer credit would not be an event that would allow a particpant to change a salary reduction election, that has no bearing on whether or not the employer can add or enhance a benefit mid-year.

What makes you think an employer cannot increase an employer credit to the FSA or amend an FSA to provide for an employer credit?

Another question. What is the employer trying to do? In a perfect world, everyone would have predicted their correct reimbursement needs and elected that amount, subject to the election limit. Now the employer comes around mid-year and throws another $400 into the account. It is $400 the participant does not need unless the election limit was below the participant's needs or the participant was unable to afford to fund the needed amount. The gesture could backfire. It could reward the ants over the grasshoppers.

[GBurns]

I know of nothing in the IRC or Treas Regs that would prohibit an employer from doing this.

However, it probably would not be of much benefit to the employer. For sake of illustration, let us assume that there are only 4 employees. Employee 1 who predicts $600 eligible medical expenses and elects a $50 monthly salary reduction really has $600 of expenses; Employee 2 predicts $600, elects $50 monthly but has expenses of $900; Employee 3 does not participate but has expenses of $400; Employee 4 also does not participate and has $0 expenses. If this employer contributes $400 to each it would be a total expenditure of $1,600. But, only $700 would actually be used for reimbursing medical expenses and $900 would be forfeited to the FSA. It would be better if this employer instead set up a standard section 105 MERP to reimburse those medical expenses that are not covered under the FSA up to this $400. The only problem might be that next year some employees might decide to reduce or eliminate their contributions to the FSA so as to make use of the employers money.

[mroberts]

This could be set up as a completely different plan as well, so I don't see any problems here.

[Guest RichelleHJ]

This is an issue that I have also been trying to resolve for more than one employer! I like the answer I'm seeing - that it can be done - BUT what about the fact that there isn't a "change of status" that allows the employee to revoke and change their FSA election? I have even discussed the issue with an IRS agent (a supposed "Medical Reimbursement specialist") I explained I was trying to find something in the code that would allow an employer to put additional money in for employees mid-year - the "less than an expert" didn't really have an answer and when I pointed out the sections regarding "change of status" and not allowing a change for an employer's additional contribution - he just agreed with me - end of conversation.

[GBurns]

I have to paraphrase that which has already been posted by QDROphile and mroberts.

What does this action by the employer have to do with either a Qualifying Event or a Change in Status? NOTHING.

What change will the employee be making to their election? NONE.

However, as QDROphile points out, the whole thing could backfire. IMHO, (In My Humble Opinion) care and more thought is needed for the plan design, bearing in mind employee communication, effective date for incurring claims and future years projection. It probably would be best to not fund ALL eligible employees, but instead put in a simple 105 MERP and take care of those who turn out to need it, bearing in mind my other caveats in a previous post.

[Guest RichelleHJ]

OK - to beat the horse to death - what if the employee made a change in coverage and as a result had additional employer dollars to spend. Could the employer put those dollars in the FSA for just one person?