When employees leave unused FSA funds on the table, that money goes to the company. But there are a number of rules that dictate how those funds can be used. And not following those rules can be costly.
‘Exclusive Benefit Rule’
According to the IRS’ proposed regs on the subject, employee FSA forfeitures can be:
- retained by the company
- used to reduce required salary reduction amounts for the immediately following plan year, on a reasonable and uniform basis
- used to increase the annual coverage amount, or
- used to defray administrative expenses.
While these options are pretty straightforward, employers also need to be aware of the ERISA impact.
The majority (but not all) of health flex spending accounts are subject to ERISA’s fiduciary duty rules, which include the “exclusive benefit rule.”
That rule essentially says that plan assets – in this case leftover FSA funds – must be used for the exclusive purpose of providing benefits to participants/beneficiaries and paying reasonable administration expenses.
So despite IRS regs on retaining funds, the exclusive benefit rule may create situations where firms aren’t able to simply retain this money.
Handling the leftovers
After determining whether the FSA is subject to ERISA, employers should take these steps with leftover funds.
First, review the plan document. It may spell out exactly how forfeitures should be handled and what steps you must take.
The next step is documentation. If you decide to use to workers’ leftover funds to pay FSA administration expenses, you’ll need detailed records showing exactly how the payments relate to the FSA.
You’ll also want documentation on the nature/amount of the expenses and the date they were incurred and paid.