Who is responsible for the money lost in my flex plan when the company changed providers mid year?
Full Question:
Answer:
A flexible spending arrangement or account (FSA) is a tax-deferred savings account established by an employer to help employees meet certain medical and dependent-care expenses that are not covered under the employer's insurance plan. FSAs are usually funded through voluntary salary reduction agreements with your employer. Health FSAs are employer-established benefit plans. These may be offered in conjunction with other employer-provided benefits as part of a cafeteria plan. Employers have complete flexibility to offer various combinations of benefits in designing their plan. You should review the agreement you entered into with your employer to determine your rights and your employer’s obligations regarding unused funds when an employer switches providers.
Established under Section 125 of the Internal Revenue Code, FSAs were once known as medical Individual Retirement Accounts (IRAs). FSAs allow employees to contribute pre-tax dollars to an account set up by their employer. They can later withdraw these funds tax-free to pay for qualified health insurance premiums, out-of-pocket medical costs, day care provider fees, or private pre-school and kindergarten expenses. Money deposited into an FSA account is forfeited if not used in the benefit year—forfeited by the employee and received back by the company. Until 2005, when the IRS issued an FSA grace period amendment, all funds contributed to an FSA had to be used within one year. The dates for that year were defined as the company's benefit plan year, a period which may or may not correspond with the calendar year. As of 2005, a company may amend its FSA Plan document to incorporate a two and one half-month grace period. This allows an employee to use the first two and half months of the next year to use up his or her FSA balance from the prior year. Anything not used within this period would be forfeit. Proponents of this new grace period hope that it will reduce concerns about losing money and encourage participation in FSA plans.
Generally, distributions from a health FSA must be paid only to reimburse an employee for qualified medical expenses incurred during the period of coverage. An employee must be able to receive the maximum amount of reimbursement (the amount the employee has elected to contribute for the year) at any time during the coverage period, regardless of the amount the employee has actually contributed. The maximum amount the employee can receive tax free is the total amount he or she elected to contribute to the health FSA for the year.
Employers are required to follow the guidelines established in Section 125 of the Internal Revenue Code when setting up an FSA. The first step involves preparing a plan document that states the conditions for eligibility, the benefits provided, and the rules that apply to implementation of the FSA. The employer must distribute these rules to eligible employees and follow them consistently. Employers are also required to file Form 5500 with the U.S. Department of Labor each year, as well as complete a series of nondiscrimination tests outlined by the IRS. Each part of the process of implementing and administering an FSA plan for employees involves legal requirements. These requirements apply to the plan document, summary plan description, nondiscrimination testing, government filings, claims administration, and plan updates. Since compliance with these requirements tends to be complex, and since the IRS imposes serious penalties for noncompliance, most companies outsource FSA administration to a third party. Any employer considering an FSA for her firm must be careful to plan for the potential cash flow needs that may be generated by early disbursements
In order to ensure these plans are fair to all employees and to limit the number of changes employees can make to their plan, the IRS has set up a number of restrictions. For example, employees are unable to carry over unused credits or benefits to the next plan year. In addition, employers need to be sure that no more than 25 percent of the tax-favored benefits go to "highly compensated" employees. These employees could be officers earning above a certain salary range or those who have a percentage of ownership in the company greater than 1 percent (if they earn over $150,000) or greater than 5 percent (for others).