Allocating experience gains

[Guest JCinCA]

It's not that I don't believe our HR Director/FSA Plan administrator but I am looking for a little more solid support for her assumption that we can return FSA experience gains to plan participants so long as the proceeds are distibuted evenly. I know IRC allows for "reasonable and uniform" allocation but is there any other source that explores this topic well? Preferably something in layman's terms.

I am struggling with the concept that a person who contributes $100 to the plan and uses all but $10 and the person who contributes $1000 and doesn't use any will receive the same amount back. The first participant makes money!

[J Simmons]

Prop Treas Reg sec 1.125-5(o) requires what you are struggling with, and your HR Director/FSA Plan administrator are explaining--unless the experience gains are simply kept by the employer (Prop Treas Reg sec 1.125-5(o)(1)(i)).

Unfortunately, if you want 'solid support' you look to the statutes, regs, IRS rulings and court rulings--which are, for obvious reasons, rarely in layman's terms.

[Guest JCinCA]

Prop Treas Reg sec 1.125-5(o) requires what you are struggling with, and your HR Director/FSA Plan administrator are explaining--unless the experience gains are simply kept by the employer (Prop Treas Reg sec 1.125-5(o)(1)(i)).

Unfortunately, if you want 'solid support' you look to the statutes, regs, IRS rulings and court rulings--which are, for obvious reasons, rarely in layman's terms.

Thanks for the response. I guess what I am really concerned with is what is meant by the phrases "(o)(1)(B) Returned to the employees on a reasonable and uniform basis, as described in paragraph (o)(2)... it is permissible to allocate these amounts based on the different coverage levels of employees under the FSA.... However, in no case may the experience gains be allocated among employees based (directly or indirectly) on their individual claims experience."

I get it but what does "reasonable and uniform basis" mean?

[J Simmons]

There are examples in the regs. Prop Treas Reg 1.125-5(o)(3). For example, it could be paid to all who had that type of FSA for the year out of which the experience gains arose, on a per capita basis weighted to reflect the elected levels of coverage.

Suppose you had just the two persons with that type of FSA for the year, one who contributes $100 to the plan and uses all but $10 and another who contributes $1000 and doesn't use any. That's experience gains of $1,010. The first person would get 1/11th (or $91.82) and the other 10/11th's (or $918.18). Prop Treas Reg 1.125-5(o)(3)(iii).

[Guest kimvb]

I would like to add a question to this topic - I cannot get a straight answer on this. If an employer has an experience gain and has no administration fees for their plan, does a plan HAVE to allocate an experience gain. We have fairly sizable experience gains each year - despite my efforts to notify employees of their balances and we even allow the full grace period to incur claims. I understand HOW to allocate them, but I want to present this to finance so we can do it and want to tell them that we HAVE to - the regs don't seem to have strong enough wording for me to go forward and say here's what we HAVE to do. Help? Does anyone know of a good source on this topic?

[J Simmons]

Previous to the August 2007 proposed regs, the guidance suggested that an employer could only keep the net experience gains from a year to the extent necessary to offset net experience losses from prior years or expenses to the employer of having the plan. The remainder had to used either to reduce the salary reduction to employees to pay for benefits elected for the next year or could be returned to the participants for the year from which the net experience gains arose, but not in proportion to the amount each participant forfeited.

The August 2007 proposed regs simply permit the employer to keep the net experience gains from a year. Prop Treas Reg 1.125-5(o)(1)(i). Prop Treas Reg 1.125-5(o)(1)(ii)© also allows the next experience gainst to be applied to defray the administrative costs. At a second spot, the introductory clause of the Prop Treas Reg 1.125-5(o)(2), "Allocating experience gains among employees on reasonable and uniform basis", provides that "If not retained by the employer or used to defray expenses of administering the plan, ... ."

Under the heading "Proposed Effective Date" in the preambles, it is provided that "Taxpayers may rely on these regulations for guidance pending the issuance of final regulations."

[Guest kimvb]

But ERISA still applies. So, if experience gains are part of a health FSA they cannot be retained by the employer as they would violate the exclusive benefit rule. I know that they can be retained to offset administrative expenses - a "reasonable" amount. In our case - our admin costs are extremely low and we have a significant experience gain each year. So I am thinking that we HAVE to do something with the gains. I am I right?