As we approach the end of the calendar year the issue of funds in employees’ Flexible Spending Accounts (FSA) always comes up. What if an employee has not used up all the funds they have in their FSA account.  The IRS now permits that up to $550 can be rolled over into the following year, if an employer permits it in their FSA plan documents.

If rollovers are not permitted or an employee has more than $550 left in their account what happens to the employees’ money in the FSA. The funds are forfeited under strict rules.

Total forfeitures are determined by adding up the dollar amounts forfeited by each participant (whose reimbursement was less than the salary reduction amount).

Net forfeitures under the FSA plan will be the total amount forfeited by employees whose reimbursements were less than their annual election amounts, reduced by the total amount of overpayments to employees whose reimbursements exceeded their salary reduction amounts (such as employees who spent their full FSA election early in the year, and then terminated employment without actually contributing to their FSA in full).

Generally forfeitures can be used for several purposes:

  1. Payment of plan administration expenses;
  2. Increasing the amount of the employee annual coverage elections;
  3. Reducing employees’ salary reduction amounts for the immediately following plan year; and
  4. Returning the forfeitures to participants in the form of taxable cash- note this would be done across all participants in a single amount, not related to the actual FSA election, or actual forfeited amount of any particular employee

Many employers will use forfeitures from some participants to cover overpayments to other participants.

Source: Really Great Employee Benefits, a division of Heffernan Insurance BrokersIRS Circular 230 disclosure: To ensure compliance with requirement by the IRS, we inform you that any tax advice contained in this communication, unless expressly stated otherwise, was not intended or written to be used and cannot be used, for the purpose of (i) avoiding tax-related penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any tax-related matter(s) addressed herein.

Really Great Employee Benefits, a division of Heffernan Insurance Brokers alerts are published as an information source for our clients and colleagues. It is general in its nature and is not intended to be and should not be used as a substitute for specific legal advice