FSA credit balance and required quarterly contributions

[Guest HaroldA]

I'm trying to determine the additional interest charge due to late quarterly contributions for a calendar year plan for 2004, and I'm not sure when and how much of my FSA credit balance I can apply to the required quarterly payments.

Here are the facts:

FSA interest = 7%

Aggregate cost method, so no amortization bases

Schedule B total FSA charges at 12/31/2003 = 165,000 (this includes a 5,000 interest charge on late quarterlies from 2003)

FSA credit balance at 12/31/2002 = 28,972

2003 plan year contribution of $300,000 deposited 8/27/2004

FSA credit balance at 12/31/2003 = 166,000 [165,000 - 28,972 x 1.07 - 300,000]

Do I have to wait until 8/27/2004 to apply my 166,000 credit balance against the 2004 required quarterly contributions?

Or, can I start applying the 12/31/2002 credit balance (rolled forward to 4/15/04 with interest) to the 4/15/04 required quarterly contribution?

[david rigby]

Do I have to wait until 8/27/2004 to apply my 166,000 credit balance against the 2004 required quarterly contributions?

Yes. If I read your facts correctly, you do not have a CB on 4/15/04 to use as an offset to the quarterly.

I don't believe the 12/31/02 credit balance has any bearing on the 4/15/04 requirement.

Have you reviewed IRS Notice 89-52? Also, see GrayBook Q&A 2002-9.

[Guest HaroldA]

I've read IRS Notice 89-52, but I have not read the GrayBook Q&A. Do you have a link that I could locate that?

I included the 12/31/2002 credit balance to show that it is not greater than the minimum required contribution for 2003. My understanding (which could be totally incorrect) of 89-52 is that if my 12/31/2002 credit balance with interest was greater than the 2003 minimum required contribution that I could apply that difference to the required quarterlies for 2004.

For example:

Same facts as above except 12/31/2002 credit balance = $160,000

So at 12/31/2003, I would have credits of $171,200 [160,000 x 1.07]

Thus giving me a credit balance at 1/1/2004 = $6,200 [171,200 - 165,000]

I could then apply 6,200 x 1.07 ^ (3.5 / 12) = 6,324 (fsa credit balance at 4/15/04) against my first required quarterly payment.

Is this correct?

[david rigby]

Sorry, I'll have to get back to the rest of your question later, but here is GrayBook 2002-9.

Funding: Quarterly Contributions and Application of Credit Balance

Plan A has a calendar-year plan year. For 2001, Plan A makes the entire minimum contribution on December 31, 2001. The resulting credit balance on that date is exactly zero. For 2002, Plan A owes a quarterly contribution of $50,000 each quarter. Plan A makes the first two contributions of $50,000 each on April 15, 2002 and July 15, 2002. If these were classified as 2002 contributions (on the 2002 Schedule B), they would exactly satisfy the first two quarterly

contribution requirements.

However, suppose the actuary reports these two contributions on the 2001 Schedule B as 2001 plan year contributions. Plan A will now report a $100,000 credit balance as of December 31, 2001, which can be used to satisfy the first two quarterly contributions for 2002. In particular, under Q&A-12 of Notice 89-52, the credit balance and interest thereon can be used to satisfy subsequent quarterly contributions once the prior year contributions have been made to generate the credit balance. What is the next quarterly contribution amount due on October 15, 2002, assuming a valuation interest rate of 8%?

RESPONSE

$46,651. On April 15, 2002, per Notice 89-52, contributions for the prior plan year made by that date can be reflected in the credit balance. Therefore, on April 15, 2002, Plan A has a $50,000 credit balance, effective December 31, 2001. This credit balance is increased with interest to $51,135 on April 15, 2002, and $50,000 of it is used to satisfy the quarterly due. On July 15, 2002, another $50,000 worth of credit balance is created, effective December 31, 2001. This credit balance is increased with interest to $52,128 on July 15, 2002, and $50,000 is used to satisfy the quarterly due. The remaining credit balances of $1,135 on April 15, 2002 and $2,128 on July 15, 2002 are increased with interest to $3,349 on October 15, 2002. Therefore, Plan A must deposit only an additional $46,651 on October 15, 2002 to satisfy the next quarterly due.

The above Response is a summary, prepared by representatives of the Program Committee, of the oral responses to the question posed to certain staff members of the Treasury and IRS, which represent only personal views of the individuals who provided them. Accordingly, the Response does not necessarily represent the positions of the Treasury or the IRS and cannot be relied upon by any taxpayer for any purpose.

Copyright © 2002, Enrolled Actuaries Meeting

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[Blinky the 3-eyed Fish]

Here is the applicable cite from 89-52. I highlighted the relevant part.

Q-12: May an employer treat all or a portion of a credit balance in a plan's FSA as a payment of a quarterly installment?

A-12: An employer may treat all or a portion of a credit balance in a plan's FSA as a payment of a quarterly installment.

Example 5 -- Assume the same facts as Example 3, except that an amount in excess of the 1988 minimum funding requirement was contributed during 1988 and that such contribution resulted in a credit balance of $10,000 on December 31, 1988. It was determined in Example 3 that the amount of the first quarterly installment due on Apri1 15, 1989 is $6,250. At that time, the credit balance, with three and a half months' interest, equals $10,227. Even if no contribution is made by April 15, 1989, the first installment requirement is satisfied because the credit balance with interest exceeds the amount of the quarterly installment due. The amount of excess, $3,977, with three months' interest to the due date of the second installment, is $4,054 and may be used to reduce the amount required to be contributed for the second installment. Therefore, as long as $2,196 [$6,250- $4,054] is contributed by July 15, 1989, the second installment requirement will be satisfied. The full $6,250 must be contributed for the third and fourth installments unless additional contributions are made for the 1988 plan year on or before September 15, 1989.

Contributions for the prior plan year will not be reflected in the determination of any credit balance until they are actually contributed to the plan. The intent to contribute the required amount within 8 1/2 months after the end of the prior plan year is not sufficient. For example, in the previous example, if no contribution for the 1988 plan year had been made by April 15, 1989, no credit balance could have been taken into account in determining the amount needed to satisfy the first installment requirement, unless the amount of credit balance as of December 31, 1987 was greater than the 1988 minimum required contribution.

So Harold, in your first example, your CB was generated by the deposit on 8/27. A literal reading of the Notice though says you can never use that CB to satisfy the quarterlies whose due dates have past. Although some will argue you use the 8/27 date.

In your second post, I agree with your calculations.