Flex Spending Account

[Guest holliday42]

Our employee elected an annual amount for his flexible spending account. For some reason it was set up in our payroll system to stop after one deduction. Therefore, the employee had full benefit of his flex spending account because it was reported to the TPA that he had elected his certain annual amount and as he sent in his claims they were paid. However, upon auditing new enrollments for 2009 it was discovered that he had only one payroll deduction made during 2008.

Queston: Can we go back and recover this amount from him in 2009?

The question is a legal one based on the Section 125 rules and I don't want to go research it. I know that if he had used all of his money in claims on January 1 and quit on January 2nd we would not have collected the money either. I just want reassurance that we can't go back and get the money.

[LRDG]

You can recover money from employee who elected to receive benefits under Sec. 125, but due to administrative error did not fund his FSA account, while receiving FSA reimbursements.

This can be accomplished via payroll reduction from '09 payroll. Take precautions that the TPA does not reimburse the 08 recovered amount to fund another FSA for 09.

Another option is to allow employee to pay with a personal check or other form of direct payment. If direct payment is the option employee selects, make adjustments for the tax savings employee did not receive via the missed '08 payroll deductions. Adjust W-2 to reflect repayment of FSA reimbursed but not previously funded.

If the total missed fsa election is $1,000, and if the total tax rate is 30%, (for FED STATE FICA plus if there is applicable municipal tax or local tax), the adjustment for all taxes should be $300, employee's balance due is $700.

edited to add: Adjust W-2 to reflect repayment of FSA reimbursements but not previously funded.

[Guest Sieve]

If I'm the employee, I probably won't pay--especially if I lost some of the $$ at year-end. I think you give the employee the choice between (i) paying the $$ through deferrals in the next year (as you suggest), or (ii) including the reimbursed amounts in compensation on the 2008 W-2. The latter doesn't get the employer its money back, but it's treating the benefits received as they ought to be treated.

[LRDG]

The employee made an irrevocable IRS election. The employee's irrevocable election and the employer's obligation to comply with IRS regs are not mitigated because of administrative error. The correction must comply with IRS regs or come as near to that as possible.

Objective should be to comply with regs, restore the employer's loss, and recover unearned income from employee.

Employee is not responsible for causing the problem, but didn't correct with P/R, while continue to file claims, and I suspect knew FSA was not being funded from salary.

Termination of employment is not an issue in this case that should affect recovery. Repayment probably will not take place without some financial imposition on employee.

Adjusting W-2 does not recover the un-earned income from employee, nor does it comply with IRS regs, particularly when there are better options that meet compliance requirements more closely.

What are you referring to 'especially if I lost some of the $$ at year-end'? The adjustments I illustrated credit the employee with payroll taxes that were not otherwise available, in the amount of $300.