Page 168 - Essentials of Payroll: Management and Accounting

Benefits
and cannot use it all by the end of the plan year, these funds cannot be
shifted to other uses, such as the reimbursement of medical expenses.
A problem for employers offering an FSA cafeteria plan is that
employees may legally make claims against the fund that exceed the

amount they have thus far contributed to the plan and then quit the
company.When this happens,the business cannot seek recompense from
the individual for the difference between the amount contributed into
the fund and the amount paid out. Nor can a company alleviate this
potential problem by forcing employees to accelerate the amount of
their contributions beyond the preset amount.
Example. Mr.Adolph Armsbrucker contributes $100 per month into

the company’s FSA fund, which will result in a total contribution of
$1,200 at the end of the year. However, he submits expenses to the plan
administrator of $550 in February,for which he is reimbursed.He has only
contributed $200 to the fund at this point, so the company is essentially
supporting the fund for the difference between $550 in expenses and
$200 in funding,or $350.Mr.Armsbrucker leaves the company at the end
of February, leaving the company with this liability.
The favorable tax treatment accorded to participants in a cafeteria
plan is only available if the plan passes several nondiscrimination tests.

First, a plan must have the same eligibility requirements for all employ-
ees; this means plan participation cannot be offered solely to highly
compensated employees, nor require more than three years employ-
ment with the company prior to participation in the plan. Second, all
plan participants must have equal access to the same nontaxable benefits
offered under the plan. Finally, no more than one-quarter of all nontax-
able benefits provided under the plan can be given to key employees.

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