If teachers and staff pre-tax money into a school district's Section 125 flexible benefits plan, can the city demand the unused balance back at year-end?

Plain-English summary

Senator Louise Lucas asked, on behalf of constituents involved with Portsmouth Public Schools, whether the city of Portsmouth could claim back unspent contributions in the school district's Section 125 "cafeteria plan" at year-end. A Section 125 plan lets employees set aside part of their pre-tax wages for benefits like health insurance, dental, or qualified medical expenses; unspent balances sometimes get forfeited under federal rules. Senator Lucas's question was whether those forfeited balances were "local funds" that had to revert to the city under Va. Code § 22.1-100.

The AG's answer: no. Section 22.1-100 requires reversion of "sums derived from local funds" that the school division does not spend during the year. Employee pre-tax contributions to a Section 125 plan are not "local funds." They are wages the employee earned and elected to redirect into a benefit plan under federal law. The plain language of § 22.1-100 does not reach them.

The opinion declined to address whether Portsmouth Municipal Code § 2-2 (the city's own local ordinance) might require reversion. The AG has a longstanding policy of not interpreting local ordinances in advisory opinions.

Currency note

This opinion was issued in 2020. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Background and statutory framework

A "Section 125 plan" (also called a cafeteria plan) is governed by 26 U.S.C. § 125. Employees can elect to redirect a portion of their pre-tax wages into accounts for qualified benefits like health insurance premiums, flexible spending account (FSA) contributions, dental, vision, or dependent care. The pre-tax treatment is the main attraction: the money never appears in taxable wages, which saves both employee income tax and the employer's share of payroll taxes.

Under Virginia Code § 22.1-85, a school board may establish a fund to provide insurance to its employees, and that fund may consist of employee contributions, government appropriations, or a combination. Section 22.1-100 then governs what happens to unspent money at year-end:

• Sums derived from the Commonwealth that are unexpended revert to the state fund of origin (unless the Board of Education directs otherwise).
• Sums derived from local funds that are unexpended remain with the appropriating governing body for use the next year. The statute also forbids redivision of those funds outside the locality.

The AG concluded that employee Section 125 contributions are neither "sums derived from the Commonwealth" nor "sums derived from local funds." They are wages that employees elected to redirect into a federally regulated benefit plan. Section 22.1-85's recognition that the school board's fund may consist of "employee contributions, government appropriations to the school board, or a combination of both" implicitly distinguishes the two. The plain language of § 22.1-100 reaches only the second category.

The opinion also flags Item 145.B.25 of the 2020 Appropriation Act (Spec. Sess. I), which encouraged localities to allow schools to carry over unexpended local funds from one fiscal year to the next, and Item 145.C.5.f.4, which provided certain carry-over authority for local textbook funds, both as context, not as the basis for the holding.

Common questions

Q: I'm a teacher with money sitting in our district's FSA. Where does my unused balance go at year-end?
A: Under the IRS rules governing cafeteria plans and the plan documents your school district adopts (which may incorporate things like grace periods, carryover allowances, or use-it-or-lose-it forfeitures). It does not, under this 2020 opinion, automatically belong to the city under Va. Code § 22.1-100.

Q: I'm on the school board's finance committee. Can we just keep forfeited Section 125 balances?
A: This opinion says § 22.1-100 does not require you to return those balances to the city. Whether you can keep them, and how to use them, depends on (1) the plan documents your district adopted, (2) federal IRS rules on cafeteria plans, and (3) any applicable local ordinance (which this opinion declines to interpret). Standard practice for forfeitures in a Section 125 plan is to apply them to administrative costs or to redistribute them among plan participants on a reasonable, nondiscriminatory basis.

Q: What does the Portsmouth city government actually want with this money?
A: The opinion is silent on motive. It is a recurring tension between cities and school boards in Virginia: cities often see school accounts as part of the city's general fiscal universe, while school boards see them as separate and statutorily protected. Section 22.1-100's prohibition on redivision of local funds outside the locality reflects a deliberate legislative choice to keep school money in the school division.

Q: Why didn't the AG answer the local-ordinance question?
A: Long-standing AG practice is to decline to interpret local ordinances, on the theory that those are matters within local control. If Portsmouth wants an authoritative answer about its own Municipal Code § 2-2, the city or school board would need to litigate it or get a declaratory judgment.

Q: How does this interact with the federal cafeteria-plan rules?
A: Federal rules drive most of the operational specifics: what counts as a qualified expense, how forfeitures are handled, what carryover is allowed. State law governs only the question of whether the funds "belong" to the city or remain with the school board for use under the plan. This opinion answers the latter, in favor of the school board.

Citations and references

Statutes:

• Va. Code § 22.1-85 (Insurance funds for school employees)
• Va. Code § 22.1-100 (Reversion of unexpended school funds)
• 26 U.S.C. § 125 (Federal cafeteria plans)

Appropriations:

• 2020 Va. Acts (Spec. Sess. I) ch. 56, Items 145.B.25 and 145.C.5.f.4 (carry-over authority for local funds and textbooks)

Prior AG opinions:

• 2006 Op. Va. Att'y Gen. 150 (declining to interpret local ordinances)
• 2002 Op. Va. Att'y Gen. 85
• 2002 Op. Va. Att'y Gen. 96
• 1976-1977 Op. Va. Att'y Gen. 17

Source

• Landing page: https://www.oag.state.va.us/annual-reports-opinions/official-opinions
• Original PDF: https://www.oag.state.va.us/files/Opinions/2020/20-022-Lucas-issued.pdf

Original opinion text

COMMONWEALTH of VIRGINIA
Office of the Attorney General
Mark R. Herring
Attorney General

December 11, 2020

The Honorable L. Louise Lucas
Member, Senate of Virginia
Post Office Box 700
Portsmouth, Virginia 23705-0700

Dear Senator Lucas:

I am responding to your request for an official advisory opinion in accordance with § 2.2-505 of the Code of Virginia.

Issues Presented

You ask:

1. Whether member contributions to Portsmouth Public Schools' Section 125 Flexible Benefits Plan[1] are within the scope of Virginia Code § 22.1-100 and therefore subject to return to the City if not expended in any year.
2. Whether certain funds held by the Section 125 plan are within the scope of Portsmouth Municipal Code § 2-2 and therefore subject to reversion to the City.

Applicable Law and Discussion

1. Section 22.1-100 of the Virginia Code does not require the School Board to return member contributions to the locality or Commonwealth.

Section 22.1-100 of the Code of Virginia provides that

[a]ll sums of money derived from the Commonwealth which are unexpended in any year in any school division shall revert to the fund of the Commonwealth from which derived unless the Board of Education directs otherwise. All sums derived from local funds unexpended in any year shall remain a part of the funds of the governing body appropriating the funds for use the next year, but no local funds shall be subject to redivision outside of the locality in which they were raised.

The second sentence of this statute requires that any "local funds" that a school division has not spent during a given year must be returned to the locality.[2] By definition, contributions paid by members of a school division's Flexible Benefits Plan are not "sums derived from local funds."[3] Under the plain language of § 22.1-100 alone, the statute's requirements for the return of "local funds" that are unspent during the year therefore does not apply to the product of such contributions, and it is my opinion that § 22.1-100 does not require the School Board to return member contributions to the locality or Commonwealth.

2. Possible reversion of certain funds under Portsmouth Municipal Code § 2-2 is beyond the scope of this opinion as it would involve interpretation of a local ordinance.

By longstanding tradition, "[w]hen a request requires interpretation of a local ordinance, the Attorney General has declined to respond in order to avoid becoming involved in matters solely of local concern and over which the local governing body has control."[4]

Conclusion

It is my opinion that funds contributed by members of the Portsmouth Public Schools' Section 125 Flexible Benefits Plan are not "local funds" that are subject to return to the City under § 22.1-100 if not expended during the year.

With kindest regards, I am,

Very truly yours,

Mark R. Herring
Attorney General

1. A Section 125 Flexible Benefits Plan, also known as a cafeteria plan, allows employees to set aside a portion of their pre-tax earnings to purchase one or more benefits offered by the employer, such as health and dental benefits. See 26 U.S.C. § 125.

2. But see Item 145.B.25 of the current Appropriation Act, 2020 (Spec. Sess. I) Va. Acts ch. 56, available at https://budget.lis.virginia.gov/get/budget/4283/HB5005/ (encouraging localities to allow school divisions to carry over unexpended local funds from one fiscal year to the next); id. at Item 145.C.5.f.4 (providing certain carry-over authority for local textbook funds).

3. See generally VA. CODE ANN. § 22.1-85 (LexisNexis, current through the 2020 Regular Session, and 2020 Special Session I, c. 1, of the General Assembly) (providing that a school board may establish a fund to provide insurance to its employees, and such fund may consist of employee contributions, government appropriations to the school board, or a combination of both).

4. 2006 Op. Va. Att'y Gen. 150, 152 n.5 (citing 2002 Op. Va. Att'y Gen. 85, 86; 2002 Op. Va. Att'y Gen. 96, 97; 1976-1977 Op. Va. Att'y Gen. 17, 17).