How Do You Hold FSA Money?

[Alf]

Can anyone help with the basics on holding FSA money?

Trust/fiduciary/audit are the three questions:

I understand that it is not reuired to be held in trust.

Is it subject to fiduciary requirements to earn interest?

Are the funds required to be audited.

Can they be kept in an account in the plan's name if it is not a trust account or does the account need to be legally titled in the employer's name?

[MGB]

There doesn't need to be any money anywhere. It can just be notional accounts on the employer's books.

Once you do set money aside, then your questions all become applicable, but there is no reason to go that far. Most set money aside because they are using a third-party administrator and having money somewhere allows the TPA to easily make use of it to pay claims. But, this can also be accomplished in other ways.

[sloble@crowleyfleck.com]

Employers are often careful to cut reimbursement checks from an employer account if they have less than 100 participants because this exempts the FSA from Form 5500 reporting.

[Alf]

Ok, this sounds like a worst case - a separate account was set up in the FSA plan's name, although it is not a trust account. The sponsor does not treat it as their money on financials and the legal title to the account is the plan.

As far as the 5500s, can this be wrapped up with the other welfare plan 5500 in sponsor's wrap document or is there something unique about FSA 5500s that prevents that.

Should sponsor get the account re-titled and treat is as if it has always been general sponsor assets?

[sloble@crowleyfleck.com]

Unfortunately, I think you're right--as the arrangement stand now the assets are "plan assets," should be held in trust, and are subject to Form 5500 filing.

I would not re-name the account in the employer's name at this point because the funds currently in that account are plan assets and "converting them" to employer funds could be viewed as a fiduciary breach/prohibited transaction/criminal conversion of assets, etc. I think you have to address the current mistake and then for a subsequent plan year (before any contributions are made) the funding could be restructured so the benefits are paid from the general assets of the employer. After that, if there are less than 100 participants then no Form 5500 will be required and if there are more than 100 participants then the filing requirements will be limited. (See 5500 instructions)

This is not an area that is subject to a high level of enforcement by the DOL, and I'm not sure what the correction should be--other than getting the assets into a trust and filing the current and late 5500s. You might check VFC guidance on the EBSA website or ask here. Nonetheless, it is fiduciary breach territory so its good to be careful.

I see no reason why you couldn't put the health FSA into the wrap plan and SPD.

[KJohnson]

I think you are right that you are outside the applicable exemption to 5500 because the funds are not being paid from the general assets of the employer. However, I am not so sure that there is a trust requirement or whether you still fall under the non-enforcement policy in that regard. You may want to look at the actual language here:

http://www.dol.gov/ebsa/Newsroom/tr92-01.html

I think the operative provisions are:

In the case of a cafeteria plan described in section 125 of the Internal Revenue Code, the Department will not assert a violation in any enforcement proceeding solely because of a failure to hold participant contributions in trust. Nor, in the absence of a trust, will the Department assert a violation in any enforcement proceeding or assess a civil penalty with respect to a cafeteria plan because of a failure to meet the reporting requirements by reason of not coming within the exemptions set forth in §§2520.104-20 and 2520.104-44 solely as a result of using participant contributions

[sloble@crowleyfleck.com]

My understanding is that Tech Release 92-01 provides an exemption only to the extent that plan assets are created SOLELY due to participant contributions, and where plan assets are created due to other reasons (such as segregating funds in the name of the plan, as here), then the trust requirement continues to apply. In other words, segregating the funds takes them outside the protection of 92-1.

[KJohnson]

Ashley,

You are probably right.

I always had the same understanding that you did. Then I went back and read the Tech Release for the first time in a few years. I was expecting to see a requirement that the particpant contributions remain unsegregated in the general assets of the employer-- but it wasn't there.

I know that EBIA takes the position that the language in the preamble to 1998 proposed amendments to regulations regarding annual reporting refutes this argument. Indeed that preamble stated that Technical Release 92-01 “does not apply to participant contributions after they have been segregated from an employer’s general assets and transmitted to an intermediary account.” 63 Fed. Reg. 68369, at footnote 5 (Dec. 10, 1998).

But, of course that was a preamble to annual reporting regulations and there is an independent requirement that if you want to be exempt from a 5500, benefits must be from the general assets of the employer. 92-01 had two parts the-- reporting aspect and the trust aspect. In the preamble, were they commenting on both parts of 92-01, or since it was a reporting and disclosure regulation, were they only commenting on the reporting aspect?

Still, I would agree that the "accepted wisdom" is that they must remain in the general assets of the employer in order to be exempt from both the trust and reporting requirements even though I don't think that the language of the Tech Release gets you there and I don't find the citation to the preamble to reporting and disclosure regulations completely authoritative.

Maybe I am safer never rethinking what I thought I knew was true?

Of course the DOL's position is kind of silly. The trust is obviously for the protection of the participants. Thus DOL says that if you leave the participant contributions completely unprotected we won't require a trust. However, if you go to the trouble of giving the participants another level of security by segregating the assets in the Plan's name, we will impose the trust requirement.

[sloble@crowleyfleck.com]

Kjohnson: I think it's good to question what we always assume! I see your points. I also agree wholeheartedly that the DOL's apparent position is silly when applied to these facts ... While logic is not always applied when trying to interpret DOL intent, I think your last paragraph suggests a reasonable prediction that they might not impose a trust requirement (or at least they might not find any harm done) in a case like this where assets are segregated in a separate account in the plan's name and other fiduciary duties are otherwise met.

I still think it would be best for Alf to get the funds in a trust, particularly since there may be some delinquent filing and other potential "red flags" that the DOL might see. Putting the funds in trust I would think help alleviate appearance of impropriety and show a good faith attempt to follow the rules once the mistake was found.