Flexible Spending Account Termination

[KevinMc]

A small dentist office who has a flexible spending account would like to terminate the plan effective immediately. Her thought is to refund any money in the plan to the participants. Is there any issue with terminating the plan prior to year end and is any formal notice/disclosure required to be sent to the participants or IRS? Any guidance would be appreciated.

[J Simmons]

Under the current proposed regulations, a plan year is 12 months. It can be shorter to accommodate a 'valid business reason'. Prop Treas Reg §1.125-1(d)(2).

If there is a valid business reason for cutting the current plan year short (and to terminate the plan before the current plan year ends), then I suggest that you give the employees about 60 days notice so that they can accelerate the use of any remaining flex account amounts, even though I do not think that notice is required.

If the plan is also an welfare benefit plan under ERISA Title I, there is an argument that unless the plan documents and summary plan description explicitly reserve to the employer the right to terminate the plan mid-plan year, as each new plan year begins there is an implied promise that the plan will continue to the end of that plan year since that is the measure of time for the election, the corresponding compensation reduction to pay for the elected flex account, and the time within which to incur qualifying medical expenses to be reimbursed out of that annual flex account. But I know of no specific ruling that ERSIA Title I so precludes a mid-plan year termination.