FSA - ER contributions

[Guest cshade]

If and employer is contributing to an FSA and there are unused funds at the end of the plan year/grace period, do the forfeitures become plan assets or do they revert back to the employer's general assets? I have a sales team that insists on setting up employer funded only plans as FSAs as opposed to HRAs, so I keep trying to find reasons to dissuade them from doing this. As always, any help is appreciated.

[Guest morris]

quote name='cshade' date='Dec 21 2011, 11:55 AM' post='217675']

If and employer is contributing to an FSA and there are unused funds at the end of the plan year/grace period, do the forfeitures become plan assets or do they revert back to the employer's general assets? I have a sales team that insists on setting up employer funded only plans as FSAs as opposed to HRAs, so I keep trying to find reasons to dissuade them from doing this. As always, any help is appreciated.

What is the sales team trying to accomplish? What is your reason for dissuading them from doing this?

In most cases, self-insured medical plans (which both the FSA and the HRA are) are usually paid from the employer's general assets.

[SLuskin]

Agreed.

[GBurns]

I think that the OP would be better understood if actual $ figures were used. For example, if the employer contributes $50 per month for a total of $600 for the year and no claims are made, leaving an account balance of $600, Would the $600 which are now forfeited funds, become plan assets or would they revert to the employer's general assets?

IMO, the forfeiture becomes plan assets which must be used for the benefit of the plan participants. The forfeitures cannot revert to the employer.

This is why I prefer a fund as needed HRA.

[Guest morris]

I think there are only 2 situations (under an FSA) that trigger a plan as having "plan asets".

1) Participant contributions are always plan assets

2) Use of a separate fund to pay benefits.

In cshade's original post, I don't think either of these events has occurred. There are no participant contributions and benefits are payed from employer's general assets. So the $600 in the example would revert to the employer's general assets.

[GBurns]

According to the OP, no benefits were paid, hence the unused employee account balance. A distinction has to be made between the employer contributions (which were, of course, from general assets) and benefits paid (which would be claims/expenses reimbursed).

If the Uniform Coverage requirement is to be met, then each contribution (each payroll) made by the employer is irrevocably made to the employee's FSA account, creating the use it or lose it condition. If the employer contribution was not irrevocable then there would be no risk and no use it or lose it.

[QDROphile]

GBurns:

How do you reconcile that view with the requirement that the entire amount of the FSA be available to pay benefits beginning on day 1? The employer is not contributing anything payroll period by payroll period unless the employer is using a separate fund. The employer has to pay benefits up to the FSA amount, but you would not call payment of benefits a contribution (unless addtional amounts were first delivered to a speparate fund to cover the excess). I am not commenting on the ultimate issue, just your portrayal in physical terms of something that does not happen. If you use the wrong picture, you might get the wrong answer. I am not saying anything about the answer.

[Guest morris]

Gburns: Interesting. So if I'm understanding you correctly, the internal accounting for each participants "account" represents a separate fund triggering plan assets rules.

[masteff]

Doesn't this fall under the FSA topic of "experience gains" which are covered in Reg 1.125-5(o)?

But then you have to determine if you're an ERISA plan because then you have to consider the exclusive benefit rule. See the last comment here: http://benefitslink.com/boards/index.php?showtopic=38942 I've also found other articles that express the same concern.

[GBurns]

QDRO

I think that you are missing the fact that in the scenario posted, which is standard for a Benefits Credit plan design, the employer does contribute payroll by payroll. If there were no payroll by payroll contributions, then there could not be an accumulation of the unused funds to create the forfeiture/reversion issue. A separate fund is not in common usage, only a separate bank account, usually accessible by the FSA Claims Administrator. That account consists of the FSA contributions, which in this case, are the employer's periodic contributions. The contributions are made each period so as to have funds available to pay any claims submitted.

morris,

Yes. It has been distributed/disbursed. It has been paid out. It is gone.

Is that any different treatment than that given things like the employer's 401(k) match? Does the match revert to the employer if the employee leaves employment and leaves his/her account behind?

[QDROphile]

If the original post meant that the employer actually has a separate fund, then one ought to raise the alarm that the arrangement is not exempt from the ERISA trust rules, so the sales team had better be setting up a trust and finding a trustee to hold the plan assets. Then it will be obvious that plan assets must remain in the trust to be used for appropriate plan purposes.