Leftover FSA funds

[Guest mharris@bmcgrp.com]

We all know the "use it or lose it" rule with regards to employees and FSA's. The question that arose during a meeting with a potential client the other day is, what can the company do with the leftover funds?

[Guest Kristine]

the company can use forfeitures to assist in paying for administrative costs of the plan or they may disburse the left over funds equally among all participants

We all know the "use it or lose it" rule with regards to employees and FSA's. The question that arose during a meeting with a potential client the other day is, what can the company do with the leftover funds?

[jpod]

Kristine: I agree with you if we're talking about a fsa subject to ERISA (i.e, a medical fsa of an employer whose plans are subject to ERISA). However, if we're talking about a non-ERISA fsa (e.g., a dependent care reimbursement fsa, or a medical fsa that is a church plan or a governmental plan), the employer can do whatever it feels like doing with the surplus, assuming the plan document was written to give the employer that kind of flexibility.

[leevena]

I agree with the response, but would caution against disbursing to participants. This can be an administrative nightmare. If the group is small, it is not that big of a deal, but with a large group of employees, and ex-employees who participated, it would become quite a chore to do this correctly. Also, I believe there would then be a tax event for the refunds.

[oriecat]

From the 125-2 Regs:

(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.