CARRY-OVER FUNDS IN FLEXIBLE SAVINGS ACCOUNTS (FSAs)
Contributions to Flexible Savings Accounts (FSAs) are currently not exempt from the excise tax and will likely play a significant role in determining whether an individual’s plan will be taxed. Although contributions to FSAs are meant for a single calendar year, there is allowance for carry-over funds during a grace period in the following year. Treasury and the IRS should allow for a safe harbor in order to prevent double counting of these amounts. The funds should only be considered for the plan year the employee contributed to the account. The following is a hypothetical example showing the impact that carry-over funds could have on companies expenditures if they are double counted the second year.
Example: Impact on companies' expenditures if carry-over funds in FSAs are double counted the second year under the application of the Cadillac tax.
Threshold for individual plan under Cadillac tax: $10,200. Hypothetical individual’s health care plan: $11,000 Excess benefit subject to Cadillac tax: $800 |
40% of $800= $320 |
Individual contributes $2,700 dollars to their FSA in the first year. The Cadillac tax applies to the total amount in the FSAs. |
40% of $2700= $1,080 |
The individual has $500 left in their FSA at the end of the year. The individual decides to carry-over the $500 into the next year. Under the current law, the $500 may be subject to the 40% excise again (double-counted). |
40% of $500 = $200 |
The total amount an individual would pay |
$320 + $1,080 + $200 =$1,600 |
Conclusion: If a company has 5,000 employees with FSAs and each employee carries over $500 in the second year, the company expenses attributable to double counting of carry-over funds would be: $ 200 * 5,000 = $ 1,000,000.
Source: Adapted from Herring and Lentz 2011