Unused FSA Funds, Exempt Pay, Electronic I-9 Storage

By Rue Dooley, Amy Maingault and Bill Schaefer Nov 1, 2006
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HR Magazine, November 2006

Q: What happens to the unused amounts in an employee's FSA fund?

A: Flexible spending accounts (FSAs) are tax-qualified reimbursement benefit plans that allow employees to pay for certain medical or dependent care expenses on a pretax basis. To maintain tax-qualified status, FSAs must comply with the requirements of Section 125 of the tax code.

Except in certain, special circumstances, Section 125 prohibits plan participants from making changes during the plan year to the elections they made at the start of the plan year. Because of that restriction, or for other reasons, some of the money contributed by employees may remain unused in an account at the end of the plan year. These amounts that are basically “left over” are forfeited by the employee, under the use-it-or-lose-it rule.

If, for example, an employee elects to contribute $1,500 to the employer’s FSA, but incurs only $500 of qualified medical expenses, the employee could forfeit the remaining $1,000 in the FSA account.

Note, though, that IRS Notice 2005-42 allows employers to add a grace period of 2 months immediately following the end of each FSA plan year. Expenses incurred during the grace period can be reimbursed from the employee’s unspent FSA funds for the recently ended plan year.

Employers may keep the money, perhaps using it for administrative costs incurred during the plan year, or they may credit the leftover funds to employees’ FSAs in the subsequent year’s plan. The latter option can occur only if the funds are allocated on a uniform and reasonable basis to all of the FSA plan participants. The employer cannot base the credit on employees’ claims experience and cannot violate Internal Revenue Code Section 125.

A fair and not-uncommon practice is to reduce the cost to all participants in the following year’s FSA plan. Employees who elected a $1,000 account, for example, might pay only $980.

—RD

Q: When we hire or fire an exempt worker in the middle of the workweek, will we violate the salary-basis test and jeopardize the employee’s exempt status if we don’t pay the employee for the whole week?

A: An employer is not obligated to pay an exempt worker’s full salary when the employee works only a partial workweek during his or her first or last workweek of employment.

Under the Fair Labor Standards Act (FLSA), workers must meet certain tests regarding their job duties and usually must be paid on a salary basis to be exempt from minimum wage and overtime requirements. The salary-basis test requires that the worker must receive a salary of no less than $455 per week.

However, the FLSA regulations state that “failure to pay the full salary in the initial or terminal week of employment is not considered inconsistent with the salary basis of payment.” During the first and last weeks of employment, an employer can pay an exempt worker an amount that is proportional to the amount of time actually worked. Payment on a daily or hourly basis that is proportionally equivalent to the employee’s salary is acceptable.

This exception to the salary-basis test does not apply to a worker who is employed only for a few days. Casual or occasional employment is not consistent with employment on a salary basis. As a result, an employee who works only a few days would not be regarded as exempt and should be paid at least minimum wage and overtime.

—AM

Q: I’m running out of storage space for my I-9 forms. Is it true that employers can now retain their I-9s electronically?

A: Yes. President Bush signed HR 4306 into law on Oct. 30, 2004. The law amends Section 247A of the Immigration and Nationality Act and allows the employer and employees to use electronic signatures to attest to the validity of the documents provided by the employee.

During the I-9 process, employers are still required to inspect the actual documents presented by the employee. I-9 forms can be maintained in various electronic formats such as PDF, and any existing I-9 forms can be converted to an electronic format if desired.

In addition to using electronic signatures, employers since April 28, 2005, have been permitted to include electronic storage as one of four methods available for retaining I-9 forms. Previously, employers could store their I-9 forms only in paper form or on microfilm or microfiche. Because the 2005 law does not mandate the use of electronic storage, employers may continue to use an alternative storage method of choice if it is more convenient to do so.

The new law offers a number of benefits to employers. Electronic storage can eliminate the need for large filing systems, thereby minimizing the need for storage areas large enough to accommodate binders or files. Companies with multiple facilities will be able to maintain one central filing system.

Having an electronic storage system that is centralized will eliminate the need to transfer individual forms when an employee moves from one location to another. The employer would no longer need to have a designated individual maintaining the I-9 process at each worksite; therefore, one person could handle the process from a central location. The I-9 process thereby can be more effective and definitely is more consistent.

Since all forms may be available in one easily accessible location, self-auditing can become more efficient and less time-consuming. The system itself can be designed to track which employees have documents that need to be reverified and when the reverification process must occur.

The backup of electronic storage can easily preserve the documents, and since they are not handled physically, they may be less susceptible to theft or loss.

—BS

Rue Dooley, SPHR, Amy Maingault, SPHR, and Bill Schaefer, SPHR, are information specialists in the Society for Human Resource Managements Information Center.

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