Year-end flexible benefit plan compliance wrap-up

Action items for year-end flexible benefit plans

While 2024 benefits planning and implementation has been in full swing, employers should wrap up a few last-minute compliance items before turning the page on 2023. Flex plan sponsors that cross these items off their year-end list will be in a great position to start the new year off strong. Below is a discussion of compliance issues that may slip under the radar at this time of year. 

2023 year-end task list

Below are 6 actionable items to ensure flexible benefit plan providers close out the year strong.

1. Flexible Spending Account (FSA) balance due reconciliation

Electronic debit cards conveniently allow Flexible Spending Accounts (FSA) participants to pay for eligible expenses at the point of sale rather than pay out-of-pocket for the expense and later submit a claim. However, if a participant uses the card to pay for an ineligible expense or fails to provide after-the-fact documentation when required, the participant owes a balance due to the plan. Otherwise, the participant has been reimbursed for an ineligible expense against IRS rules.

Plan sponsors have a few available options to recoup the balance due from participants and should attempt to do so before the end of the year. The most common recoupment method is for the plan administrator to offset the balance due against a subsequent eligible claim submitted by the participant. However, if the participant does not submit a claim to offset the balance due during the plan year, the employer may require repayment of the balance due or, if permitted by state law, withhold from the participant’s pay. If these recoupment efforts prove unsuccessful, employers should treat the balance due as they would any other business debt. 

2. Dependent Care FSA W-2 reporting

Dependent care FSA sponsors must report the amount of dependent care benefits reimbursed to participants for the calendar year in box 10 on Form W-2, including amounts reimbursed under a salary reduction (Section 125) plan. Employers should receive reliable data reports from their FSA administrator, which can be shared with payroll or tax teams for accurate reporting on the W-2.

3. FSA forfeitures

The Use-or-Lose rule applicable to FSAs can result in participant forfeiture of unused funds at the end of the plan year. While adopting a grace period or health FSA carryover may soften the impact of forfeitures, employers often still receive year-end forfeitures and should plan to utilize those forfeitures compliantly. IRS and ERISA rules dictate how FSA forfeitures can be used by the employer. Under ERISA, experience gains from participant health FSA forfeitures are plan assets and subject to fiduciary rules. Several potential options comply with both sets of rules, although the most common use of forfeitures is to offset the administrative expenses of operating the plan. 

4. Plan document updates

The start of the new year is a frequent time for plan changes, whether adding a new benefit or changing the design of existing benefits. If those changes are made to an ERISA plan, including FSAs or HRAs, the plan’s legal documents may need to be updated before the start of the new plan year. Employers with plan changes should confirm with vendors and advisors whether new plan documents are needed and work to get those in place and distributed to participants before the start of the plan year. 

5. Non-discrimination testing

Each year FSAs and HRAs must pass nondiscrimination testing (NDT) to ensure a disproportionate amount of the benefits under the plan do not flow to certain prohibited employees. Plans that have yet to confirm the passage of NDT should run final tests before the year ends. Doing so allows plans to make corrections to prohibited employees' contributions and ensure the plan passes testing for the year. Plans that learn of NDT failures after the year ends find remediation burdensome. 

6. HSA eligibility rule communication for Healthcare FSA participants 

Health FSA participants transitioning to HSA participation in the new year should understand how 2023 FSA participation may impact their 2024 HSA eligibility. In particular, FSA plans with a grace period or carryover feature and delay or entirely prevent HSA eligibility for the 2024 plan year. However, with proper planning and understanding of HSA eligibility, 2023 FSA participants can ensure they are eligible to contribute to an HSA on the first day of 2024. Employer education efforts are a key to guiding participants.

Closing out the year strong 

Employers and benefits professionals have incredibly packed to-do lists at this time of year, and issues like those outlined above may feel like a low priority. For that reason, Forma proactively supports our customers as they navigate these issues and others throughout the year to ensure every detail is noticed. As a result, our customers can feel confident looking ahead to 2024 knowing 2023 is all wrapped up.

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