Forfeited, Unused FSA Balances – New Options for Employers
Cafeteria plans have long been a popular benefit for employees that also provide a tax benefit for the employer. A win-win! Cafeteria plans, or flexible benefit plans, are authorized by the Internal Revenue Code (IRC Sec. 125) and are also often referred to as Section 125 plans. These plans enable employers to provide employees with an additional benefit package at virtually no extra cost while reducing both the employer’s and the employees’ tax bills.
Flex plans allow employers to upgrade and customize the array of benefits offered while keeping a handle on total benefit costs. Flex plans range from the most simple (that merely pay group insurance premiums with pretax dollars) to the most complex (that provide benefit credits and a choice of types and levels of benefits that may be chosen and paid for on either a pretax or a posttax basis).
As with so many of the once simple and mundane responsibilities of HR professionals, cafeteria plans went through some COVID-inspired transitions that employers should be sure to be familiar with in preparation for the closing out of the plan year. Please continue to our blog for an update on options for employers for forfeited balances on cafeteria plans.
Employers Have Options for Forfeited Cafeteria Plan Funds
Q What are employers allowed to do with forfeited, unused employee flexible spending account (FSA) dollars?
A The Internal Revenue Service (IRS) generally provides employers with a few options for forfeited balances, depending on which FSA plan is available to the employees.
Recently, though, the IRS has allowed for more flexibility in plans to assist with the nation’s response to the COVID-19 outbreak, which may reduce, or even eliminate, the number of employees with a forfeited balance. This additional relief has recognized that, because of the outbreak, unanticipated changes in the availability of certain medical care and dependent care may mean employees are more likely to have unused amounts at the end of the plan years. With this consideration, the IRS has developed temporary exceptions to avoid forfeitures.
The Internal Revenue Code essentially provides for two general types of Section 125 cafeteria plans: health care assistance and dependent care assistance. You can adopt plans with a grace period under both types that will allow employees to spend unused account funds. For health care plans, you can adopt a plan that currently allows for carryover of up to $550 at the end of the year. Under the statutory and regulatory requirements, amounts that haven’t been spent by the end of the grace period, nor carried over to the next year’s plan (and that don’t fall into any of the temporary guidelines under the emergency COVID-19 rules), are forfeited under a “use-or-lose” rule.
Legally, an employer that maintains a cafeteria plan can either retain such forfeited funds (potentially subject to tax and Employee Retirement Income Security Act (ERISA) limitations) or use in one of three ways:
- Defray expenses to administer the cafeteria plan;
- Return to the employee on a reasonable and uniform basis; or
- Reduce the required salary reduction amounts for the next plan year on a reasonable and uniform basis.
Allocating on a reasonable and uniform basis, for purposes of these options, means the employer must evenly distribute the amounts based on a permissible basis (i.e., different coverage levels, but not based on actual contributions).
Typically, the option to defray administration costs is the most commonly chosen option because it’s the most cost effective and requires the least amount of administration and direct communication with the employees. Whichever option you choose, be sure to indicate it in your plan document and coordinate with your third-party administrator (TPA) to ensure it can handle the option.
Article courtesy of content partner BLR. Author, Jason R. Mau, is an attorney in the Boise office of Parsons Behle & Latimer.