FSA's - can employer invest salary reduction amounts?

[Guest fcdeacy]

Is it permissable for an employer to invest money 'collected' from employees for their FSA's in an interest bearing account?

Thanks,

Fred

[Alf]

Yes. It is the employer's money and they can do whatever they want with it. There should not be a trust associated with an FSA, so the money is just general assets of the sponsor.

[GBurns]

You are not being serious are you? I really hope that you were just joking.

[QDROphile]

So share the joke with all of us. Looks like a perfectly good answer to me. An FSA can be funded through a trust, but usually is not.

[GBurns]

Do you also believe that the employee's salary reduction that is being help pending any claims "is the employer's money and they can do whatever they want with it" ? Spend it, use it to pay the rent, loan it out or invest in whatever (whether interest bearing or dividend paying)?

[QDROphile]

The employer has the obligation to pay claims in accordance with the plan terms. How it manages particular dollars is not prescribed and prudent use of employer resources depends on the circumstances. In fact, too much set aside can cause compliance problems.

I gave you that last sentence so you can continue your tirade on a new angle, if you like.

[GBurns]

The only new angle would be to suggest that you use your new dictionary to look up "tirade". To regard the total number of words used so far as being "prolonged" is more than a stretch even if your mood (regardless of any causative frustrations) makes my posts seem "abusive".

[david rigby]

Good grief.

GBurns, my view of this "conversation" is that you have not yet responded to QDROphile's first comment. Likely, more than one reader would be interested in the reasoning behind your first comment. Thank you.

[mbozek]

I have always understood that salary reduction funds are considered to be the er's assets and which can be invested in any fund the employer chooses since the assets are not held in a trust. Given low investment return for short term money no one has ever got excited about investing 125 salary reduction.

[jsb]

An option my FSA TPAs have always offered (and we've always declined) is to deposit all salary reduction money with them. That way the funds are "instantly" available to pay participant claims on a daily basis without the bother of our having to transfer money to them. We pay FSA claims every 2 weeks and have seen no reason to move to daily. They would, of course, return anything that is unused following the plan year claim filing deadline. I suppose I could negotiate with them to use interest earnings to offset their fees.

The payment of FSA claims is just a cash flow issue. Why wouldn't the company manage it as such, doing the same thing with extra FSA money as it does with any other funds that are not immediately needed? Even leaving the money in the corporate bank account is an investment to the extent that it would be taken into account by the bank in calculating your monthly bank charges.

[QDROphile]

You are wise not to turn money over to the TPA. You did not go into details about what you meant by "turn over," but that is potentially the type of set aside that can cause compliance problems.

[GBurns]

pax etc,

I thought that I had answered in my second post.

It is not that the employer cannot or should not invest the funds in a MM or other interest bearing account. It is that the employer cannot do as they like with the funds and that it is not employer money, per se, it is employee money that is being treated as employer contributions that are being held "in trust" pending the submitting of claims.

Once the salary reductions etc have been made, the employer has to hold the funds somehwere. Whether in the generaal assets account or in a separarte account does not matter, as long as the funds are readily available when needed and unless the Plan Document says where it should be held.

If the employer "can do whatever they want with it" does that not put the availability at risk? Does that also mean that the employer can ignore whatever it is that the Plan Document says must or should be done with the money?

If the salary reductions are just barely sufficient to meet the periodic claims and there is no significant surplus. Why would the money be kept anywhere other than in the general assets account? If kept anywhere else and if anywhere else is not dictated by the Plan Document, would putting it in an interest bearing account restrict availability or cash flow to an extent sufficient to cause a delay in the paying of claims?

It is the "It is the employer's money and they can do whatever they want with it" and ignoring the PD, availability and cash flow etc issues that I have a problem with NOT where the money is held although that has its own questions.

[mbozek]

I have never seen a Plan doc for a 125 plan that makes any reference to investment of contributions because a 125 plan does not have any assets.

[Alf]

It sounds like the question was answered several responses ago. I consider the general assets of the employer as = to the employer being able to do whatever they want with the funds, but of course, technically, the employer should not do anything illegal or improper with the money.

Additionally, verify that everything is consistent with the plan document. The key is that there should be no formal trust or legal account in any name other than the employer's.

[GBurns]

I have never seen a Plan doc for a 125 plan that makes any reference to investment of contributions because a 125 plan does not have any assets.

Good point, but if the employee salary reductions etc are not plan assests, What are they?

If they are funds being "held in trust" or "held in escrow" "or "allocated" for the purpose of paying claims, then isn't there a fiduciary responsibiliity or "prudent man" responsibility to not only safeguard the funds but also to have them readily available for the purposes intended? If so then how can it be that the employer "can do whatever they want with it"

Maybe the reason why PDs make no mention is because it was never expected that employer's would feel that it was their money and "can do whatever they want with it".

[MGB]

They are not plan assets in any way, shape or form. They are a debt of the employer, pure and simple (albeit a "contingent" debt, because some participants will forfeit money from not submitting full claims). An employer treats that debt as any other debt. How they use the assets of the company in the mean time before they actually pay the debt is totally up to them. It is perfectly legal to have NO ASSETS backing up that debt (for example, a small service-oriented company that has no assets) and pay claims completely out of future cash flow of the company.

It IS the employer's money and they CAN "do whatever they want with it."

These are salary REDUCTIONS. The money never existed to begin with; it is purely a promise by the employer to cover an expense in the future and only exists as a bookkeeping entry as a debt. (Assuming there is no associated trust, which is the case 99%+ of the time.) A debt doesn't necessarily have assets identifiable with it.

[GBurns]

I will not bother to quote the many sections of the albeit Proposed Treas Regs that explain why this is NOT employer money although it is being treated as such for a certain very limited purpose and solely to meet the requirements of a specific section of the Code for a specific purpose.

I also will not address your asset versus liability or your "contingent liability" issues.

Nor will I address why 1.125-2 Q7(b)(7) refutes your employer asset contention.

I will just go ahead under cases such as Grande v Allison Engine where the Judge, aside from questioning the relevance and validity (as have other Courts) of the merely Proposed Treas Regs, regarded the payment of FSA funds as being the return of the participant's own money. If it is "His own money" it cannot be the employer's money.

[KJohnson]

I agree that under the plan asset regulations they are definitely plan assets. However underf ERISA Technical Release 92-01 (T.R. 92-01) these plan assets are exempt from the trust requirement as long as they are maintained as part of the general assets of the plan sponsor until used to fund benefits. Also, I thik you could have problems under 92-01 if salary reductions are sent to an intermediary account other than an account that is part of the plan sponsor’s general assets.

However, once they are in the general assets of the employer, who is to say what is the plan's assets and what is the employer's? If the employer did not maintain sufficient liquidity of its general assets to pay the claims, then I think you might have a fiduciary issue, but with no requirement of the trust and a requirement for it to be part of the general assets it would seem to be impossible to say---those particular $$ are the plan's assets you are investing imprudently.

[jsb]

How can it be "His own money" if an employee can collect it before "paying" it into the plan? Wouldn't that be like borrowing against future wages with some sort of obligation to repay, which is clearly not part of an FSA plan?

[GBurns]

That is the point.

It is the employee's money that he could have taken in cash but instead had it set aside under an explicit provision of the Code for specific purpose determined by the employee subject to certain rules. If the employee does not meet the rules then "use it or lose it" applies. But even then it does not revert to the employer under the "FSA Experience gain" rules but might partially come back to the employee. Under the "FSA Experience Gain" rules of 1.125-2 Q7(b)(7)amounts left in the FSA revert to the premium payers and even uses the phrase "the participants for premium paid by salary reduction or employer contrinutions" to define premium payers. Why would there be the word "return" if the FSA Salary Reduction amount was not the employee's money? You can only "return" something to where it came from.

Read the Court Opinion then go tell that to the Judge if you still do not agree with the reasoning behind the interpretation of the Treas Regs etc.

[KJohnson]

Gburns--I agree that the amounts withheld are clearly plan assets and that fidciary rules apply other than the trust requirement. I think the EBIA green manual agrees with this also.

My point is that if the assets of the employer and plan are permissibly commingled, then it would be hard to prove any fiduciary breach if the employer, at the end of the year, can account that the amount of $ withheld were used for benefits or administrative expenses If it can't do this you have fiduciary issues such as the employer directly pocketing any experience gains (forfeitures) and not using them for plan purposes. As long as the employer gets this right, I am not sure why the employer could not invest the amounts as it pleases.

As for the Grande decision, as I recall the real issue was whether services incurred in one year could be reimbursed in another. The FSA relied on the proposed treasury regs but the SPD referred participants to IRS Publication 502. 502 said that you could include the medical and dental expenses paid during the year regardless of then the services were provided and the FSA was lost based on its own SPD

[GBurns]

To support the real issue in Grande there was deliberation and study of the applicable law. It is in the explanation of the conclusion that you will find the rationale as to the conclusion. Among the rationale was the statement that it was "His money". It was not the main issue it was part of the logic of the opinion.

There are reasons why the employer cannot do as he wishes and why he could or would be held accountable before the end of the year.

First for it to be determined at the end of the year would mean that there was a cessation of reimbursements at whatever time before the end of the year that the money was not available for whatever reason. This would be failure of the plan under the "Uniform coverage ..." rules of 1.125-2 Q.7(b)(2) which says that the money "must be available at all times". How difficult would it be to meet this standard if the funds are anywhere else other than the general checking account?

Under most state labor laws, salary reductions and deductions, must be used for the purpose intended within a specified time. If audited by the State anything other than immediate availability should cause a problem. If you claim that ERISA preempts state labor laws regarding a Salary Reduction Agreement in an FSA, this employer would then possibly have more stringent standards imposed such as a Trust , PT and fiduciary requirements etc. I can just imagine what the DoL would have to say about the employer freewheeling with the money and the payment of claims.

What happens if the employer does as he wishes with the money and it loses value? Can the employer just make an ad hoc make up contribution? Can the Plan accept an ad hoc contribution or an unscheduled contribution? If there was only employee elective contributions allowed in the Plan, Can the Plan accept an employer non elective contribution?

So there are the issues of availability, potential loss, non acceptance of an employer make up, state law.

There are other issues but these should be sufficient.

[mbozek]

The FSA funds in the employer's possession under the uniform coverage rule are fungible, i.e., they are general assets of the employer and any assets of the employer can be used to pay the benefits provided under the FSA without identification of the source from which they originated.

[g8r]

Wow. Looks like this could go on forever. This long post doesn't help.

Try not to get too technical - step back and think about this in "concept."

Think of the FSA as an insurance policy where each individual sets the policy maximum. The employer is the insurance company and the employee pays the "premiums" pre-tax via a cafeteria plan. That alone explains the uniform coverage rule and the use-it-or-lose it rule. Just like an insurance policy -- either you have full coverage or you have no coverage. And, if you pay more premiums than what you spend, tough luck - you lose it.

The debate going on here is what the employer (insurance company) can do with the money. If this were an insurance company I'll take a wild guess that they invest the premiums received and don't pass along those gains to policyholders (o.k. - every once in a while there could be a premium reimbursment to all policyholders). Of course the insurance company is regulated and the setting of the premiums does take into actuarial assumptions. But, they have taken on a liability and there is regulatory oversight to ensure that there are funds available to pay the promised benefits.

Now back to the FSA where the employer is the "insurance company". There is limited regulatory oversight. These are plan assets under ERISA. However, there isn't the same level of protection b/c there is no trust or adequate funding requirement. In fact, what happens if in the first month of the FSA, the total reimbursements exceed the amounts collected? Where does the money come from to pay the benefits - does it come from the employer's bank account as a "loan" to the plan (I know - a poor choice of words)? I've actually heard of plans limiting the total payments to the total amounts collected (on a plan wide basis, not per participant). This is consistent with the point GBurns and others are making -- there is a plan and it has assets. It's just that these assets are commingled with the employer's general assets.

And, that leads back to the original question. The employer has general assets that can be invested. It's not inconsistent with any of the rules. Yes, there could be a loss and possibly no funds to pay benefits. But, the employer could go bankrupt and the employees would be in the same situation.

The DOL is aware of that ... the reason for 92-01 is that it's not clear whether the benefit to employees in protecting the assets is worth the costs associated with maintaining a trust. That issue has been out there for almost 13 years now.

GBurns point is that the fiduciary rules under ERISA still apply, i.e., one must still put on a fiduciary hat when dealing with these assets. Sure, the employer could use the assets for whatever purpose it wants b/c there is no trust to prevent it. But, that doesn't mean there hasn't been an ERISA violation. And, I think that's the point GBurns is making. Is investing the plan assets in a "prudent" manner an ERISA violation? I'd say no. But, prudent here may mean it's likely we'll have to pay out everything we collect so we may need to stick with a money market account.

If the money is invested prudently and there is a gain (or a loss), does that mean the gain belongs to the plan? Probably so. But, I go back to the tracing rules. How do you distinguish between which assets of the employer belong to the plan and which are general assets. As long as you have a general cash account that equals the value of the benefits owed, then I'd just argue that the funds being invested are the employer's general assets and the funds in the cash account are the plan assets.

Or, as stated in a prior thread, I'd say that the earnings are being used to defray plan expenses. Let's face it, if an employee elects $1200 in an FSA and pays $1200 to the employer (oops - I mean to the employer that is holding the assets on behalf of the plan), then there are costs that are not being charged to participants. The employer is entitled to recoup these amounts. If this were an insurance company, the costs would not just be the administrative costs. It would also reflect experience gains and losses due to the use-it-or-lose it rules and the uniform coverage rules.

End of story (for me)....

[Guest nobletorch]

Wow - what a hot topic - sorry i missed it -

Given all that has been said and argued let me add these points

Ask the DOL - what happens to employers who withhold money from paychecks and don't use the money correctly--- They have dim view of that

Secondly - the conversation jumps between a section 125 Plan (which may include more that the FSA) and just FSA's --- Are there not some differences in what needs to happen the plans other than FSA's.

A third point is that the HCRA contibution is treated like an insurance prem.

This account operates for all practical purposes like a mutual insurance company.

Happy New Year

[Guest Red]

It may be helpful to consider the differences in treatment of FSA contributions by the IRS and the DoL.

The IRS treats contributions as a straight salary reduction: you've voluntarily asked your employer to pay you less, in exchange for a promise of benefits of equal monetary value over the course of the plan year. By following the guidlines of Section 125, you've avoided constructive receipt, and, as far as the IRS is concerned, never got this money at all.

This is an important point: you never had the money. It's not yours, it's your employer's, because you asked for an anti-raise (a "lower"?) in exchange for non-taxable benefits. The employer can do whatever she likes with the money you decided not to be paid, since it's just part of her general assets.

The DoL, in very sharp contrast, considers FSA contributions to belong to the participants; regardless of how the IRS deals with the monies for tax purposes, the DoL requires employers to treat contributions as participant contributions. Despite the non-enforcement of the ERISA trust requirements under Technical Release 92-01, these are still plan assets (Herman v. Jackson County Hospital, e.g.), whether they are ever actually separated from the employer's general assets.

As a practical matter, without a trust, there's no tracking which particular dollar in the employer's general assets belong to which participant, so there appear to be few actual limits on what the employer can do with the money that's saved (real-world, employers often deposit an amount equal to the employee's salary reductions on a pay period by pay period basis in a checking account to cover the plan's expenses, but there's no requirement to do so). Nonetheless, if you blow all your assets and have nothing to pay back the particiapants' salary reductions, you're going to have a major problem with the DoL.

Hope this helps.

[GBurns]

Red,

I think that you are taking the Regs etc out of context when you state "By following the guidlines of Section 125, you've avoided constructive receipt, and, as far as the IRS is concerned, never got this money at all". The Regs 1.125-1 Q6say that a SRA "will have the effect of causing the amounts ...to be treated as employer contributions" and "to have such amounts contributed, as employer contributions, ...on their behalf". The Regs do not make it not be employee money it only allows treatment for purposes of section 125.

Phrases such as "the effect of causing" and "to be treated" indicate a dispensation for a stated purpose not a change in ownership. That is why you should read the wording used by the Judges in cases like Grande v. Allison where it says it is the employee's money. Note should also be taken of the wording in Phelps v. C.T. Enterprises which unlike Grande which relates directly to an FSA but still relates to employee salary reductions.

As far as limits to what the employer can do, you might want to use Phelps and its references to see some of the limits.

[Guest Red]

GBurns,

I don't disagree. My post was just to illustrate how the differing points of view by the IRS and the DoL can lead to some confusion. I can readily understand how a sponsor, reading the regs without a broader legal context, would come to the conclusion that there's no practical fiduciary obligation to treat the 125 monies as employee contributions. Section 125 is deceptively brief, and it's easy to hang more than one interpretation on the language in the Code.

Your citations are excellent; I'm holding onto them for the next time I need to argue with somebody about this issue. Thanks for the background.

[GBurns]

Add these, although the attached are related to 401(k) plans, I consider them relevant because the source is similar, namely employee salary reductions and although 401(k) plans have more specific rules, logic dictates that the treatment should be fairly similar:

http://www.401khelpcenter.com/401k/perdue_401k_deposits.html

http://www.401khelpcenter.com/mpower/feature_longday.html

[Guest grafals]

The rules pertaining to a 401(k) plan have nothing to do with a cafeteria plan or FSA because a 401(K) is a cash or deferred arrangement, while an FSA or cafeteria plan is NOT A DEFERRAL. It is an ELECTION. All contributions are EMPLOYER contributions, not EMPLOYEE contributions. Trying to make a parallel misses the basic premise of such plans.

Fiduciary standards apply because ERISA states that it is applicable to welfare benefits plans and the DOL has clarified that such plans need not be funded for it to apply.

FSA's are commonly and routinely referred to as self-insured benefits. The employer is self insuring the benefits. In fact, the code and regulations permit the benefits derived under an FSA to exceed the actual amount of salary reduction, provided the benefit does not exceed them by more than 500%. Moreover, claims up to the annual benefits limit must be paid, regardless of the amount of salary reductions that occur to the date of the claim. Thus there is no required correlation between salary reduction and benefits paid. Obviously, the salary reduction does not, therefore, provide a funding source for benefits. It is simply the vehicle by which constructive receipt is avoided, to avoid tax liability on the value of the benefit. The salary reduction agreement is the payment of a premium, not funding of a plan. The premium for the benefit (don't think of it as money, its a benefit, not a box of cash) is NOT the employee's money. It is the Employer's money (the code and the regulations are clear enough about this). The employee ELECTED (NOT DEFERRED) to give up cash, opting INSTEAD to receive an alternate benefit. VOLUMES have been written on the distinction between this election and a deferral. Thus, the contributions to a 125 plan and benefits derived through an FSA are "Employer Contributions," NOT "Employee Deferrals." Sections 105 and 106 deal with amounts paid to health plans which are self insured by the employer, not deferred by the employee. Deferrals fall under Sub D.

Constructive receipt avoidance is in fact the reason why these plans exist. The whole purpose is to avoid tax liability. If the employee constructively receives (has a vested right to) the amount of the election, then the amount and the benefit is taxable. Keep in mind that IRC Sec. 105, 106 and 125 all come under Subtitle A (Income Taxes); Chapter 1 (Normal Taxes); Sub B (Computation of Taxable Income); Part III (Items specifically excluded from gross income). Both Cafeteria Plans and FSAs are creatures created solely by the tax code. Absent those sections dealing with the excludability of the benefits from income, these plans would not exist. You could create a plan to reimburse your employees for the costs of shoes if you want. But, it won't be tax qualified, so nobody will participate. The IRS gave recognition that as long as there is no present right to receive, the employee won't have to pay tax on the amount of income otherwise used to pay premiums.

If the benefit isn't used by the employee , then premiums paid generally go to cover plan expenses, which are otherwise paid by the employer (just as with any other insurance company). Once the expenses are covered, the employer's obligation is generally met, unless the contract provides otherwise, and the employer released from liability under the plan (i.e. keeps the $). I am not aware of any ERISA plan where an employer gets to convert participant contributions to its own use at the end of the plan year. The same holds here, since the salary reduction bought coverage, the coverage was provided, and the premiums earned by the employer.

References to fungible money and tracing and plan assets are misplaced since the nature of these plans is that of an insurance contract. There is no need to track or hold or reserve the amount of salary reductions. Salary reductions are just that, a reduction in the company’s salary expense. The reduction is consideration for the company’s promise to provide FSA benefits. There is no reason why a company couldn't pay claims under an FSA with money it borrows, as long as it lives up to its end of the bargain, which is to pay claims. The contract is actually quite simple. You give up salary in the amount of X, I will reimburse you for permissible expenses in the amount of Y. X and Y may or may not be the same. If a company cannot meet its FSA obligations, that means the company is INSOLVENT. The FSA liability is a debt owed by the company. When the company can't pay its debts, it is INSOLVENT.

By their nature, funds not held in trust, remain general assets of the employer, and thus subject to the claims of general creditors. The funds backing up the employer's obligation under an FSA are the capital accounts of the company. If the company goes BK, then the participants get in line with all the other creditors. Take a look at the GL of any company and I bet you won't find an asset account containing FSA funds. You might find a CONTINGENT liability account in the amount of the potential reimbursements. But, its unfunded and contingent liabilities are off balance sheet. The cash backing up the obligation is capital. So, to answer the actual question, why wouldn't a company invest their capital?

FCDEACY, invest away!

[P.S. The Grande case had only to do with when reimbursable expenses are incurred, and the hierarchy of plan documents to be relied on by participants. The court in this unreported district court case over $1,800, concluded that information provided to Grande was vague and should be interpreted in his favor in regards to whether expenses had to be incurred or billed during the plan year in question. No new law was stated in this completely unremarkable case. The Welfare Benefits Guide 9:6 Medical Benefits (2004) states in reference to this case, "The only thing this court case should be used for is to illustrate the fact that employee communications should be clear and concise."]