FSA Forfeitures

[Guest benefitsanalyst]

Are there any specific rules on how a plan can utilize the forfeitures from a health care and dependent care flexible spending account?

[oriecat]

Yes, they are in the treasury regs. Forfeitures turn into experience gains for the plan, so if you want to search further on the issue, that term may be more fruitful.

http://www.irs.gov/pub/irs-utl/tres_reg-1125-2.pdf

(7) FSA experience gains. If a health FSA has an experience gain with respect to a year of coverage, the excess of the premiums paid (e.g., employer contributions, including salary reduction contributions and after-tax employee contributions) and income (if any) of the FSA over the FSA's total claims reimbursements and reasonable administrative costs for the year may be used to reduce required premiums for the following year or may be returned to the premium payers (the participants for premiums paid by salary reduction or employee contributions) as dividends or premium refunds. Such experience gains must be allocated among premium payers on a reasonable and uniform basis. It is permissible to allocate such amounts based on the different coverage levels under the FSA received by the premium payers. However, in no case may the experience gains be allocated among premium payers based (directly or indirectly) on their individual claims experience.

[Guest benefitsanalyst]

Thanks very much for your response. This information was very helpful.

I have one follow-up question. Can the experience gains be used to offset FSA administrative costs for a future plan year.?

For example, we had $5,000 in experience gains for the 2004 plan year. Can we use this $5k to offset the FSA administration costs for the 2005 plan year?