Ques­tion: If an employ­ee has a small health flex­i­ble spend­ing account (FSA) bal­ance with a car­ry­over to the next year, and the employ­ee choos­es not to par­tic­i­pate in the new FSA year, can the employ­er force the employ­ee to use those funds so as not to incur addi­tion­al admin­is­tra­tive fees in the next plan year?

Answer: An employ­er can pre­vent “per­pet­u­al car­ry­overs” by care­ful­ly draft­ing the cafe­te­ria plan doc­u­ment with respect to car­ry­over amounts. IRS guid­ance allows car­ry­overs to be lim­it­ed to indi­vid­u­als who have elect­ed to par­tic­i­pate in the health FSA in the next plan year. Health FSAs may also require that car­ry­over amounts be for­feit­ed if not used with­in a spec­i­fied peri­od of time, such as one year. Note that this plan design requires addi­tion­al admin­is­tra­tion (to track the time lim­it for each car­ry­over dol­lar, for instance) as well as order­ing rules (e.g., will car­ry­overs be used first?), so you will need to care­ful­ly review the cafe­te­ria plan doc­u­ment. Under no cir­cum­stances are amounts returned to participants.

Accord­ing to IRS guid­ance, a health FSA may lim­it the avail­abil­i­ty of the car­ry­over of unused amounts (sub­ject to the $500 lim­it) to indi­vid­u­als who have elect­ed to par­tic­i­pate in the health FSA in the next year, even if the abil­i­ty to par­tic­i­pate in that next year requires a min­i­mum salary reduc­tion elec­tion to the health FSA for that next year. For exam­ple, an employ­er spon­sors a cafe­te­ria plan offer­ing a health FSA that per­mits up to $500 of unused health FSA amounts to be car­ried over to the next year in com­pli­ance with Notice 2013–71, but only if the employ­ee par­tic­i­pates in the health FSA dur­ing that next year. To par­tic­i­pate in the health FSA, an employ­ee must con­tribute a min­i­mum of $60 ($5 per cal­en­dar month). As of Decem­ber 31, 2016, Employ­ee A and Employ­ee B each have $25 remain­ing in their health FSA. Employ­ee A elects to par­tic­i­pate in the health FSA for 2017, mak­ing a $600 salary reduc­tion elec­tion. Employ­ee B elects not to par­tic­i­pate in the health FSA for 2017. Employ­ee A has $25 car­ried over to the health FSA for 2017, result­ing in $625 avail­able in the health FSA. Employ­ee B for­feits the $25 as of Decem­ber 31, 2016 and has no funds avail­able in the health FSA there­after. This arrange­ment is a per­mis­si­ble health FSA car­ry­over fea­ture under Notice 2013171. The IRS also clar­i­fies that a health FSA may lim­it the abil­i­ty to car­ry over unused amounts to a max­i­mum peri­od (sub­ject to the $500 lim­it). For exam­ple, a health FSA can lim­it the abil­i­ty to car­ry over unused amounts to one year. Thus, if an indi­vid­ual car­ried over $30 and did not elect any addi­tion­al amounts for the next year, the health FSA may require for­fei­ture of any amount remain­ing at the end of that next year.

Orig­i­nal­ly pub­lished by ThinkHR — Read More