How hard is it to terminate an FSA plan mid-year?

QWe’re frustrated with our FSA third-party administrator. We want to scrap the current plan and start a new plan with a new third-party administrator without waiting until the end of the plan year. What are the consequences of terminating our FSA plan mid-year?




A:  I recommend you don’t terminate your current plan just because you don’t like your third-party administrator. And, even if you don’t like your current plan, it would be better to simply move your current plan to a new administrator providing records of contributions-to-date and reimbursements-to-date and let them “take-over” your FSA and follow it through to the end of the plan year. Doing so, there are fewer consequences because the only risk is that a claim or two might be paid twice (once by the old administrator and once by the new administrator). 

If you decide you truly want to terminate the plan mid-year, the consequences can be severe when a plan just ends. You and your employees run the risk of big losses.

  • Participants who have made large Health FSA elections in anticipation of medical expenses to be incurred later in the year will not be able to use those funds for future reimbursements. You’ll have some angry employees.
  • The employer can lose big when some participants may have received more in reimbursement than they contributed to the plan (and, no, you cannot deduct the difference on their paycheck).

So, I strongly recommend you switch to a new FSA administrator mid-year and run the plan as is to the end of the plan year. If you decide to terminate your plan mid-plan year, be sure to give participants plenty of advanced warning so they can incur expenses to at least attempt to break even with what they’ve contributed when the plan is terminated.

-Gina



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