Q.- Several employees are not using the full amount in their FSA. Can we take the unclaimed money and use it as part of general assets? Can we give the money back to the employee?
A. No. Any forfeitures an employer receives relating to unused FSA accounts become FSA plan assets. As such, the amounts must be used to benefit all employees participating in the FSA. It is generally not advisable to give the FSA forfeiture directly back to the individual to whom the forfeiture relates.
Typically, FSA forfeitures are used to
- defray reasonable administrative expenses of the plan (for example, pay TPA charges),
- reduce all participants premiums for a future plan year (for example, reduce the payroll withholding of the election amount by the dollar amount of the forfeiture being reimbursed).
- increase the annual coverage amount for all participants the following year (for example, give all participants an extra dollar amount in their accounts), or
- give a cash reimbursement back to all participants (as taxable income).
The rules on this issue are complex, so we strongly suggest that you consult your legal or tax counsel for the proper way to address the situation.
