|
How to Handle Forfeited FSA and DCAP Funds
As an employer who may sponsor a flexible spending account (FSA) or dependent care assistant program (DCAP), you are probably familiar with the "use it or lose it" rule. In other words, employees who contribute money to these plans must spend all of it within the given plan year, otherwise forfeit the money to the employer. We often receive questions from both employers and employees regarding what can be done with this money. Employers actually have four different alternatives to handle these funds in order to comply with the IRS guidelines. These options are as follows:
Forfeited FSA Funds
(1) Defray reasonable administrative expenses: This option is easiest as it usually only requires a bookkeeping entry and payment to the third-party administrator (TPA) of the FSA plan. The TPA's total monthly administrative charges for the year would most likely exceed the amount of forfeited dollars, so this takes care of the situation. Keep in mind, though, that the Department of Labor has identified the following requirements in order for the administrative expenses to be considered "reasonable".
- Payment to the TPA must not be prohibited by the FSA plan document. For instance, if the plan document requires that the employer pay for administrative expenses, then the employee-forfeited funds cannot be used to offset administration costs.
- The forfeited funds cannot be used to pay for FSA set-up fees, or to pay for
a different plan (such as a DCAP).
- The funds must be used to pay for administrative expenses directly tied to
managing the FSA.
The next three options must comply with two general rules: (a) Forfeited money must be distributed to employees on a reasonable and uniform basis (either equally per person, or on a weighted average basis according to each person's contribution level), and (b) forfeitures cannot be distributed to employees based on claims experience (i.e. employees who forfeited money due to insufficient claims cannot receive a higher distribution than employees who exhausted their funds).
(2) Reduce annual premiums: The forfeited dollars may be used to reduce the FSA premium in the next plan year for all eligible employees. For example, if a TPA charges an annual fee of $700 (in addition to the monthly administrative fee), and there is $200 in the forfeiture account, the annual premium can be reduced to $500.
(3) Increase annual coverage amount: Forfeited funds can be used to reimburse claims above the elective limit in the next plan year as long as such reimbursements are made in a nondiscriminatory manner.
(4) Provide cash refunds: Employers can distribute the forfeited funds in cash to the participants of the plan. This option is the least popular due to the administrative hassles, especially if an employer has to track down former employees. In addition, the cash refund would be considered W-2 wages for FICA and federal income tax withholding purposes.
Forfeited DCAP Funds
There are some similarities and differences in the way DCAP forfeitures can be handled compared to the FSA options described above. The first three alternatives below are identical for both DCAP and FSA funds, however, the fourth option is different. Unlike an FSA, forfeited DCAP funds cannot be used to increase the annual coverage amount. Since the IRS limits the amount employees can contribute to $5000 annually, employers cannot distribute forfeited funds in a way that would violate this limit. However, employers can simply keep the money and not redistribute it back to the employees or offset plan expenses. DCAPs, unlike FSAs, are not subject to ERISA, which requires that forfeited funds are tied back in some way to the plan.
(1) Defray reasonable administrative expenses
(2) Reduce annual premiums
(3) Provide cash refunds
(4) Employers keep the money
While it is important for employers to understand all of the options available to handle these funds, the goal is to provide sufficient education to employees so that they can avoid forfeiting contributions altogether. If you have any questions about implementing and/or maintaining a successful FSA/DCAP program, just give your Benefits Consultant a call!
|
