In July 13, 2018

You are limited to these four options under the tax code.

If you have employees who have flexible spending accounts (FSA), you may be wondering what to do with any leftover money. FSA accounts are great tax-advantage plans that help manage out of pocket medical expenses. Sometimes money is leftover at the end of the year. Here, we address what you should do with that money.

A health FSA may have leftover money, also called experience gains, if salary withholdings and employer contributions are more than the amount for health FSA reimbursement for that year. These experience gains are also called forfeitures because if left unused, the participants forfeit their remaining balances under a use or lose rule.

Health FSA forfeitures are subject to many rules that fall under the tax code. There remain four permissible uses under these rules. You can choose from the following options, depending on your plan document.

  1. A plan sponsor is able to use forfeitures to pay for any reasonable administrative expenses that apply to the plan. It must be for the FSA, however – FSA forfeitures cannot pay for any other plans. Forfeitures are also unable to pay for certain fees like the settlor expense fee (the initial expense for setting up a plan).
  2. A plan sponsor may also use the forfeitures to lower salary reductions of employees, known as a premium holiday. It must be done on a uniform and reasonable basis, meaning you cannot return money to employees based on their claims experience. It would violate the use or no use rule.
  3. A plan sponsor may also use the forfeitures to change the annual coverage amount. The forfeitures must be allocated, again, on a uniform and reasonable basis and cannot be based on individual claims experience. The document must be reviewed carefully because if a limit exists on benefits, some amendments may be required before this option can be taken advantage of.
  4. Another option is a cash refund which is a refund to all employees – not just to employees with underspent accounts. Again, this must be done on a uniform and reasonable basis.

Precise Payroll can help you to determine how you will handle any excess in your FSA plan.

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