Returning FSA experience gains to participants

[Guest kmbing]

Our FSA has an experience gain from last year (2005) that is great enough to offset the plan's administrative expenses for the year and then some. The plan sponsor wishes to return the remainder to plan participants in the form of a per capita premium reduction for the 2006 plan year. But, what do you do when the participants in the plan this year are not the same as those that were in the plan last year? (i.e. several new employees have joined the company and several have left the company) Should participants who joined the plan this year still receive part of the refund or should it be limited to current employees who participated in the plan during the year the gain was incurred?

[Guest llerner]

You can use it to cover admin. expenses or have a party. It's not up to the administrator. It belongs to the employer. What you suggest is highly appropriate and permissable without a doubt.It is a very common scenario.

This is why many employers actually prefer a cafeteria plan and balk at HSAs. They don't want to give anything to the employees when they terminate. Some also do not like HRAs and modify the plan documents to state that there is no carryover of funds at all.

Many of our clients use this to offset plan expenses while some larger employers may return it to the participants. Did you ask them why they were directing you to return to the participants rather than offset plan expenses?

[jpod]

llerner: Can you use experience gains from a health fsa to have a party? I think not.

[saabraa]

As I recall, the regulation speaks of divvying up the excess in a nondiscriminatory manner. So, potentially either way could work. That is, include or exclude the new participants (though excluding seems more fair, all other concerns being equal) unless there's a potential for discrimination, such as if all the new participants are HCEs. Offhand, having a party sounds good, but that isn't one of the regulation's options.

[Guest kmbing]

well, here's my next question (or two) -- is there anything legally wrong with using the experience gains to just keep offsetting the reasonable administrative expenses year after year until the gains are exhausted? (if that's what the plan sponsor wants to do)

Or, what if the company wants to do nothing with the money and wait to see if we have an experience loss for this plan year and offset 2006's loss with 2005's gains? Can the company just hold onto the money and offset losses from future plan years?

[jpod]

saabraa: My "party" comment wasn't based on the IRS' proposed regulation. I was referring, implicitly, to the DOL's apparent view that the surplus assets are "plan assets" for Title I purposes.

[oriecat]

The money doesn't belong to the employer, it belongs to the plan. So no the company can't hold onto it. The plan holds onto. And yes, the plan can continue to carry it over each year. Nothing requires you to clear out the balance at the end of the each plan year. We've been carrying a balance every year now. We reimburse plan expenses and then carry over the rest.

[rocknrolls2]

If there are many employees in the company and therefore, a lot of plan participants, the only viable option would be to reduce administrative expenses. Otherwise, you would, at best, be able to reduce premiums by pennies on the dollar.