Q.- We received a report identifying the amounts that employees did not use in their FSAs from last plan year. What can we do with the forfeited amounts?
A.- In determining how FSA forfeitures may be used, both IRS regulations and ERISA must both be considered.
IRS Regulations
Under IRS proposed regulations, forfeitures may not be distributed based on individual claims history but can be used in one or more of the following ways:
- Defraying Plan Administration Expenses. For example, using forfeitures to pay administrative fees related to running the FSA.
- Reducing Future Salary Reduction Requirements. For example, applying forfeitures to reduce employees' salary reductions for the immediately following plan year, on a reasonable and uniform basis.
- Increasing Future Coverage Amounts. For example, allocating forfeitures to increase the annual coverage limit available under the FSA.
- Cash Refunds to Participants. For example, returning forfeitures to participants on a reasonable and uniform basis (this may raise ERISA considerations, as noted below).
ERISA Requirements
For ERISA-covered health FSAs, forfeitures are considered plan assets and are subject to fiduciary rules, including the exclusive benefit rule which requires plan assets to be used solely for the benefit of participants and beneficiaries or to defray reasonable administrative expenses of the plan and the prohibited transaction rule which prevents plan fiduciaries from benefiting personally from plan assets.
This generally means that forfeitures may not be kept by the employer or used for the benefit of any other plan (e.g., a dependent care FSA, even if it covers the same participants). Forfeitures must either:
- Be used to pay reasonable, direct administrative expenses of the health FSA; or
- Be returned or allocated to participants in a way that complies with IRS and ERISA standards.
Because these issues involve complex tax and ERISA considerations, we encourage you to consult with legal counsel or a qualified benefits advisor before deciding how to handle forfeiture amounts.
Benefit Allocation Systems (BAS) provides best-in-class, online solutions for: Employee Benefits Enrollment; COBRA; Flexible Spending Accounts (FSAs); Health Reimbursement Accounts (HRAs); Leave of Absence Premium Billing (LOA); Affordable Care Act Record Keeping, Compliance & IRS Reporting (ACA); Group Insurance Premium Billing; Property & Casualty Premium Billing; and Payroll Integration.
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This article is for informational purposes only and is not intended as legal, tax, or benefits advice. Readers should not rely on this information for taking (or not taking) any action relating to employment, compliance, or benefits. Always consult with a qualified professional before making decisions based on this content.
