Refunding of Flex Gains

[oriecat]

The gains in our flex account continue to accumulate each year and we are thinking about refunding some to participants. Each year we refund ourselves for the admin fees, and even after that we should have over $5k left over. If we do choose to make a taxable refund to participants, should it be done equally to each, or proportional to their annual election? Also since this past years experience gains include experience gains from previous years, is it proper to just refund based on the most current participants or should participants from all years with gains be included? Is it permissible to split the gains between health and dependent care based on actual experience, or does it all have to be lumped together?

[SLuskin]

It is certainly ok to allocated between medical expense and dependent daycare expense.

We often recommend that the client use excess (over the amount of admin fees) forfeitures to seed the accounts in the following year. That way, the amounts are not taxable, and all the eligibles participate in the plan. It is a great way to teach reluctant employees the benefits of the plan. The funds can also be used as part of the contribution toward the health insurance premium.

[oriecat]

Thanks for your reply. After I posted I started thinking more about making it easier instead of taxable refunds and thought perhaps a flex premium holiday in the new plan year would be a way to do it. So we could fund everyone's account for a payroll but not deduct the funds, and have the deposit moved from the gains account. Would that be a permissible way of doing it?