United States 

Office of 

Personnel Management 

The Federal Government’s Human Resources Agency

Benefits Administration Letter 

Number: 06-801 Date: September 14, 2006

Subject: The Federal Flexible Spending Account Program (FSAFEDS): 

 Transfer of Funds between the Two Types of Flexible Spending Accounts

Background 

Each year, some employees who enroll in FSAFEDS erroneously select a Health Care Flexible 

Spending Account (HCFSA) or Dependent Care Flexible Spending Account (DCFSA) when 

they meant to select the other type of account. Internal Revenue Service guidance allows certain 

pre-tax elections to be corrected if there is clear and convincing evidence of an error. There 

were about 800 of these errors in 2005, and approximately 572 through the first six months of 

2006. These errors generally fall into one of two types: 

1. The employee thinks that he/she needs to enroll in a DCFSA to cover eligible 

health care expenses for his/her dependents. 

Example: Holly Lawrence enrolls in a Health Care FSA with an annual election of 

$250 and a Dependent Care FSA with an annual election of $500. By February, she 

has been reimbursed her full annual HCFSA election. Holly continues to submit 

claims for otherwise eligible health care expenses, which are denied since her annual 

election amount has already been reimbursed. When Holly contacts SHPS to 

question the claims denials, she is surprised to learn that the DCFSA does not 

reimburse for health care expenses for her dependents. 

2. The employee simply selects the wrong account during enrollment and does not 

 realize the error until after allotments begin, or until he/she submits a claim that is 

 denied. 

Example: When enrolling during Open Season, Ann Green inadvertently enters a 

dollar amount election for a DCFSA. Ann has no children and no other eligible 

dependents, so she cannot benefit from her mistaken election. 

Under FSAFEDS policy, and in accordance with Internal Revenue Service guidelines, these 

“mistaken elections” can be corrected via Account Funds Transfer (AFT), as long as there is 

clear and convincing evidence that the election is indeed mistaken. The AFT procedures are 

discussed below. 
Another type of situation may arise if an employee and his/her spouse both elect a DCFSA, and 

their combined election exceeds the IRS maximum of $5,000 per family. However, this situation 

does not meet the “clear and convincing” standard of a mistaken election. The couple may 

receive reimbursement up to the full election of each person and then resolve the withholding 

error when they file their Federal tax return. They would need to complete Form 2441 (attached 

to Form 1040), and add the excess pre-tax election back into income. Since the tax return will 

then show that they have additional dependent care expenses that are deemed to have been paid 

with after-tax dollars they may be able to use that additional amount to claim a dependent care 

tax credit on Form 2441. Thus, the extra allotments are not “lost” but can still be used to offset 

some dependent care expenses. 

 

Account Funds Transfer (AFT) Procedures 

Generally, these potentially erroneous accounts are identified by the employee, by reviewing 

his/her Earnings and Leave Statement, or by following up on a claim that he/she believes to be 

erroneously processed. 

1. The employee contacts SHPS, the administrator of FSAFEDS, or SHPS contacts the 

employee, depending on who first discovers there may be an error. 

2. SHPS determines that an administrative error has occurred, consulting with OPM and/or 

the BENEFEDS Portal as needed (please refer to BAL 06-203 for information about 

BENEFEDS). 

3. SHPS removes the year-to-date payroll allotments it has received from the employee’s 

payroll provider for the erroneous account and deposits them into the correct account in 

its billing system, as well as in the employee’s account summary. 

Note: the employee may already be enrolled in the other account type, or SHPS may need 

to create a new account as part of this process. 

4. SHPS increases the participant’s annual election for the correct account by the amount 

elected for the erroneous account. 

Example: using Holly Lawrence’s example from page 1, SHPS adds $500 to Holly’s 

HCFSA account, the amount of her (erroneous) DCFSA annual election. SHPS then 

closes her DCFSA account. 

5. SHPS, via BENEFEDS, sends the appropriate transaction codes to the employee’s 

payroll provider on the next regular billing file using the agreed-upon file format for the 

specific payroll provider. This includes: 

• Stopping the allotment for the erroneous account 

• Changing the allotment amount for the correct account or adding the account 

type if appropriate. 

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Note: depending on the timing of the next billing file, this process may need to occur over 

more than one pay period. 

6. The payroll provider receives information in a pre-arranged timeframe and format and 

uses that to ensure that the employee’s W-2 will correctly reflect actual elections and pretax allotments taken from salary. 

7. The payroll provider makes necessary changes within the timeframe such that the 

employee’s W-2 accurately reports pre-tax deductions for the correct(ed) account(s). 

Choice of Two Methods

Payroll providers may choose from two methods to process AFTs. Each payroll provider 

needs to determine which method makes the most sense, based on historic or expected 

volume, system capability, and other factors. In addition, a payroll provider can elect the 

manual process as an interim measure until necessary system or other software changes can 

be made. 

Method A: Transfers via billing file (automated)

SHPS will transfer funds from one account to the other. This will be communicated to 

BENEFEDS, which will send the account funds transfer details to the payroll provider on the 

next billing file. BENEFEDS will work with the payroll provider to establish the revised 

billing file layout to include the transfer amount. This information will indicate the amount 

and other details of the transfer. The payroll provider will adjust the HCFSA and DCFSA 

amounts accordingly to reflect actual deductions for W-2 reporting purposes. 

Method B: Transfers via report (manual)

If the payroll provider is unable to receive transfer details on the billing file (as outlined in 

Method A above), SHPS, via BENEFEDS, can supply the necessary information for the 

payroll provider to process the transfer in one of two electronic formats, both transmitted by 

a secure delivery method. 

• Microsoft Excel (spreadsheet) 

• Text file 

FSAFEDS Administrative Fees 

Agencies will not be billed again for employees requiring an account funds transfer. However, 

fees already billed for the wrong type of account will not be reversed because we assume over 

time the differences will be negligible and they will balance out. 

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What We Need From You 

We need each payroll provider to complete and fax the attached questionnaire as instructed on 

the form, by September 30, 2006, to communicate how you wish to handle account funds 

transfers. Please submit only one questionnaire per payroll provider. 

We also need to know if there are any issues or concerns about your agency being able to 

accommodate this process – whether manual or automated – no later than the end of this 

calendar year. 

 

If you have any questions or comments about the Account Funds Transfer process, please 

contact Jeremy Pucko at BENEFEDS via email at jpucko@ltcpartners.com , or send an email to 

BENEFEDSPortal@opm.gov. 

 Sincerely, 

 

 Robert F. Danbeck 

 Associate Director 

 for Human Resources Products and Services 

Attachment: Payroll Provider Questionnaire 

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