Timeframe for Employer Obligation to Create FSA Account

[Guest Kara B]

A flexible spending account TPA (who will remain nameless) agreed to complete the manual creation of FSA accounts for plan members for a plan effective date of 1/1/08. The plan's sponsor admittedly does things the old way -- they agreed to send a monthly check to the TPA with a roster of FSA participants and their corresponding contributions, hence the manual process.

We just discovered that now 6 weeks into the plan year, the FSA accounts have not been created. At this point, some employees have contributed on a weekly basis and there are pending claims. We are in the process of working with this highly non-respondent TPA to rectify the situation, but the plan sponsor (our client) is concerned that there may be some legal liability if as a result of this the claims are not reimbursed in a timely fashion.

Is there a defined limit to the time that a plan sponsor can take to establish FSA accounts on behalf of employees who have had pre-tax contributions deducted from pay--similar to the maximum time for establishing a 401(k)? Is the plan sponsor left with any legal exposure in this situation?

I assume that because FSA accounts are not interest bearing and there is no significant risk for financial loss when they account is not created quickly (as in a 401(k), for example) that there may be no real issue.

Thanks in advance for any help you might be able to provide.

[QDROphile]

Whoa! What you are describing does not look like it will comply with the exemption from ERISA trust requirements. It looks like you are setting up a separate fund for the health FSA. Is the money going to be held in trust?