Beyond the balance: the intricacies of closing your FSA plan year

As a timely reminder, April is the month that many client partners are closing their Flexible Spending Account (FSA) plan year as a result of being on a Jan. 1 renewal and the corresponding 90-day deadline to file claims. Carryovers have rolled, grace periods have been exhausted and the plan year submission deadline is in the rearview mirror. It’s time to shift focus to final plan year reporting and closing the books to keep the pre-tax advantages of the plan preserved.  

There are a few best practices to consider as you prepare for and complete your Flexible Spending Account plan year. Keep in mind that proper closure of the plan year is crucial to maintaining the tax advantages of your FSA plan.

Review and communicate your plan details year round

• Verify that you understand the plan’s rules, deadlines and requirements. Make certain that your plan’s details are communicated well, and communicated often, to the plan participants. Confirm that your plan documents are readily available to plan participants and that they are informed how to obtain them.
• Remind employees of upcoming deadlines and requirements to provide adequate documentation to the plan administrator. This includes related proof of the paid expenses that meets all of the administrator’s requirements. This can be accomplished through intranet alerts or postings, email blasts, mailed reminders and postcards and/or meetings and webinars.
• Assess your plan’s substantiation performance and process. Consider, do the communication strategies align with your business philosophies and what your employee’s respond to? Are the substantiation requirements clear and easy to understand? Collaborate with your plan administrator to understand and have a participatory role in how your employees are informed of their substantiation obligations. Seek out educational materials and guides to make available to your employees to inform them of the importance and details of fulfilling their substantiation obligations.

Monitor balances and unsubstantiated claims

• Regularly assess the balances that your plan participants are carrying and the amount of forfeiture that the plan is experiencing. Unspent balances could be an indication of employees not understanding how to use the plan or a lack of awareness of plan deadlines. Consider running a regular cadence of reporting to evaluate plan balances, such as monthly report outs.
• Keep tabs of your claims that are getting denied year-round due to either nonresponse or inadequate response to the substantiation process. Depending on the size of your employee population, you may be able to communicate with them and resolve outstanding substantiation issues through that collaboration prior to the plan year closing. An FSA’s best advocate is a good consumer. If you are frequently and clearly communicating, your FSA participants will help you spread the word about how to resolve substantiation requests with their peers.

Tax unsubstantiated claims

• Your FSA administrator should be going through a series of communications to substantiate paid claims (debit card transactions) and reporting to you any denied paid expenses resulting from the completion of those exercises without satisfactory results. These claims cannot remain reimbursed tax-free.
• Inform employees that the reimbursement will be treated as taxable income.
• Report these values as taxable income on the employee’s W-2.

Close your plan year

• It’s time to formally close the plan year. Obtain final plan year reporting from your administrator. Verify that all plan year processing has been completed. Provide the plan’s forfeiture reporting to the appropriate internal accounting functions.
• Document actions taken tied to unsubstantiated claims and taxation for your plan records.

With another FSA plan year in the books, your employees can thank you for maintaining these great tax-advantaged benefits which promote both physical and financial wellness.