It's hard to believe 2018 will be wrapping up in a few short weeks. As you plan your company benefits for next year, one thing to take into consideration is health flexible spending accounts (FSA) with balances that could roll over into next year.
On a side note, the Internal Revenue Service recently released the 2019 FSA limits. Next year, employees can contribute $2,700 to their FSA, up from the 2018 limit of $2,650. The amount for dependent care FSAs remains at $5,000 in 2019 for married account holders filing a joint tax return or filing as single/head of household ($2,500 for married account holder filing a separate tax return).
If an employee has a small health 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?
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, 2018, Employee A and Employee B each have $25 remaining in their health FSA. Employee A elects to participate in the health FSA for 2019, making a $600 salary reduction election. Employee B elects not to participate in the health FSA for 2019. Employee A has $25 carried over to the health FSA for 2019, resulting in $625 available in the health FSA. Employee B forfeits the $25 as of December 31, 2018, and has no funds available in the health FSA thereafter. This arrangement is a permissible health FSA carryover feature under Notice 2013-71.
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.
This blog is not intended to be exhaustive nor should any discussion or opinions be construed as legal advice. Readers should contact legal counsel for legal advice.