Negative FSA balance
Ki
27 Posts
We have Medical and Dependent Care Expense Reimbursement Plan. If an employee elects for $1200 to be withheld for medical, uses (is reimbursed for expenses) all $1200 of it during January, and then terminates employment at the end of February when only $200 has been withheld so far from his paychecks, am I correct that we are not allowed to withhold the remaining $1000 from the employee's final paycheck?
Is the situation the same if it was dependent care withholding?
Can someone point me to the IRS regulation that states this? I must have it in writing.
Thanks.
Is the situation the same if it was dependent care withholding?
Can someone point me to the IRS regulation that states this? I must have it in writing.
Thanks.
Comments
That is the biggest risk to the employer. Over the past few years we have probably averaged out. Some years we go in the red and some years there is money left over/not used; which then belongs to the employer and does not go back to the employee if not used.
The HR Director tells me we have no Summary Plan Description for the Med/Dep Care Expense Reimbursement Plan. The actual plan document makes no mention of what happens when someone terminates having used up their funds prior to the entire amount being withheld.
I'm also not having much luck on the IRS website.
"The IRS instituted a proposed regulation, subsequently enacted into the Tax Code by Congress, that required Section 125 plans to not allow the deferral of income from one plan year to the next with the exception of a 401(k) component. This became known as the "use it or lose it" rule."
"From a spending account perspective, there is no difference between medical and dependent care when it comes to this rule. The rule operates as follows: if an eligible service under either account has not been incurred during the plan year, the participant must forfeit (and may not be reimbursed for such forfeiture directly or indirectly) his or her account balance. Most employers provide some grace period during which participants can continue to submit claims for eligible incurred expenses during the previous plan year. The most common grace period is 90 days."
"Who gets the forfeited amounts? Technically, the plan (which is a separate entity and existing as either a trust or, more commonly, a segregated account on the employer's books) keeps the money. It can be used for any ERISA-eligible plan purpose such as the payment of future claims, plan administrative expenses, or to provide an across-the-board benefit allocation to either all participants or all eligible employees in the next plan year. The most common disposition of these monies is for either administrative expenses or to "insure" against a relatively new IRS proposed rule, the "risk shift."