What if an employer decides to pay bonuses to cafeteria plan participants, in amounts equal to the unspent part of their medical expense reimbursement accounts? Assuming income and FICA taxes are paid on these bonuses, and there is no written or oral promise on the part of the employer to make these bonuses in the first place or ever again, would the "use it or lose it" rule be violated?

Why doesn't this violate Reg. 1.125-2, Q&A 7(B)(7) -- "in no case may experience gains be allocated among premium payers based (DIRECTLY OR INDIRECTLY) on their individual claims experience"?

This certainly would seem to qualify as an *indirect* reimbursment based on individual claims experience. . .

But then again, this is only a proposed regulation . . .

We tell employers that they cannot do that because it violates the use it or lose it. We generally have something written into the document telling the employer that they can use any forfeitures to reimburse themselves for losses taken on any employees who front-loaded and quit, and to defray administrative expenses of the plan. After that, if there are $ left, and the plan uses benefit credits, the $ can be used as credits. If no credits, it can be distributed on a percapita basis to the participants in the plan without regard to whether or not they had money left in the plan.