Health FSA forfeitures

[JACKndERISABox]

Lets assume employer has 100K in Health FSA forfeitures fro the applicable year. As I understand it, to the extent forfeitures represent "experience gains," the section 125 rules and ERISA would regulate what an employer can do with the forfeitures (i.e, defray plan expenses, reduce EE salary reductions for the following PY or refund). Lets assume now that the loss experience (i.e., the amounts the employer ate in overspent accounts relating to mid-year terms) is 95K resulting in net experience gains of 5K. lets assume further that the admin expenses for the Heath FSA for the applicable year are 5K.

5K out of the 100K in gross forfeitures is eaten up by the admin expenses leaving gross forfeitures of 95K, which after applying the the experience loss results in 0 net experience gain for the applicable year. Does that mean that the employer can use the 95K in forfeitures (i.e, net forfeitures after deducting the 5k in admin expenses) as its sees fit (even for paying expenses for unrelated benefit plans) since there are no experience gains? Brian, thoughts?

[Brian Gilmore]

I think some of the concepts got jumbled in the example.

You start here with $100k in forfeitures.  That's your gains.  Then you reduce those forfeitures by the $95k losses caused by overspent accounts from mid-year terminations.  That's your losses.

Sometimes you'll have net experience gains (if forfeitures exceed overspent accounts) and sometimes you'll have net experience losses (if overspent accounts exceed forfeitures).

So in this example you have $5k in net experience gains ($100k forfeitures - $95k overspent).  You have three choices for how to apply that $5k in gains:

• To reduce required salary reduction amounts for the immediately following plan year, on a reasonable and uniform basis;
• Returned to employees on a reasonable and uniform basis; or
• To defray expenses to administer the health FSA.

In this case, you have at least $5k of administrative expenses associated with the health FSA TPA.  So you use the $5k experience gains on the administrative expenses.  That's the end of the story.

• Here's a post with more discussion: https://www.newfront.com/blog/fsa-experience-gains-from-forfeitures

Here's a quick slide summary:

2024 Newfront Section 125 Cafeteria Plans Guide