Dayton, OH asked in Tax Law, Consumer Law and Employment Law for Michigan

Q: Do plan administrators of flexible spending accounts have a fiduciary duty to provide advance notice of forfeitures?

If unclaimed funds remain in an FSA as the use-it-or-lose-it deadline for claim submission approaches, would a plan administrator’s failure to provide timely warning of imminent forfeiture constitute fiduciary negligence?

1 Lawyer Answer
James L. Arrasmith
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  • Consumer Law Lawyer
  • Sacramento, CA

A: The question of whether flexible spending account (FSA) plan administrators have a fiduciary duty to provide advance notice to participants about potential forfeitures of unused funds is a complex one that doesn't have a definitive answer. Here are a few key considerations:

Fiduciary duties under ERISA: FSAs are governed by the Employee Retirement Income Security Act (ERISA). Under ERISA, plan administrators are fiduciaries and have certain duties, including acting solely in the interest of plan participants and beneficiaries. However, the specific scope of those duties when it comes to providing notices about forfeitures is not clearly defined in the law or regulations.

Plan documents and communications: The plan documents that establish the FSA typically outline the use-it-or-lose-it rule and the deadline for submitting claims. Many plans also send periodic reminders to participants about deadlines approaching. An argument could potentially be made that failing to provide any notice at all despite knowledge of a large unclaimed balance may fall short of fiduciary obligations. However, if the forfeiture provisions were clearly disclosed upfront and reasonable reminders were provided, likely no breach occurred.

Lack of definitive guidance: To date, there hasn't been clear legal precedent or regulatory guidance stating that FSA administrators have an affirmative fiduciary duty to warn individual participants about impending forfeitures of their specific unclaimed balances beyond the usual disclosures and reminders. Without an unambiguous requirement, it would be difficult to establish fiduciary negligence.

Practical and privacy considerations: Singling out certain participants to receive targeted notices about their FSA balances could be viewed as intrusive and may raise privacy concerns. Administratively, it may also be quite burdensome to track each individual's account and provide such customized notices.

In summary, while an expansive view of fiduciary duties might suggest administrators should make every effort to avoid forfeitures, the prevailing view seems to be that clearly disclosing the use-it-or-lose-it rule upfront and providing general periodic reminders is sufficient to meet ERISA's fiduciary requirements with respect to FSAs. However, the lack of definitive legal authority leaves some ambiguity. Employers who want to go above and beyond could consider providing additional targeted notices as a best practice, but it's likely not required.

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