Employers have options for forfeited cafeteria plan funds

Q         What are employers allowed to do with forfeited, unused employee flexible spending account (FSA) dollars?

A   The Internal Revenue Service (IRS) generally provides employers with a few options for forfeited balances, depending on which FSA plan is available to the employees.

Recently, though, the IRS has allowed for more flexibility in plans to assist with the nation’s response to the COVID-19 outbreak, which may reduce, or even eliminate, the number of employees with a forfeited balance. This additional relief has recognized that, because of the outbreak, unanticipated changes in the availability of certain medical care and dependent care may mean employees are more likely to have unused amounts at the end of the plan years. With this consideration, the IRS has developed temporary exceptions to avoid forfeitures.

The Internal Revenue Code essentially provides for two general types of Section 125 cafeteria plans: health care assistance and dependent care assistance. You can adopt plans with a grace period under both types that will allow employees to spend unused account funds. For health care plans, you can adopt a plan that currently allows for carryover of up to $550 at the end of the year. Under the statutory and regulatory requirements, amounts that haven’t been spent by the end of the grace period, nor carried over to the next year’s plan (and that don’t fall into any of the temporary guidelines under the emergency COVID-19 rules), are forfeited under a “use-or-lose” rule.