Can an employer charge an employee for the balance of a health care FSA if the individual’s employment ends midyear? If not, how can employers limit risk?

 

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Generally, the uniform coverage rule does not allow employers to charge an employee for the balance of a health flexible spending account (FSA) if his or her employment ends mid-year. The rule requires that the full amount elected by an employee for an FSA must be available for reimbursement at any time during the coverage period or plan year. Employers cannot limit the amount of reimbursement to the amount the employee has contributed thus far during the plan year. Additionally, employee contributions may not be accelerated based on the employee's incurred claims and reimbursements.

Sometimes, this restriction results in an employee leaving the organization with reimbursed expenses that are greater than his or her contributions to date. For example, assume an employee elected to contribute $1,500 to an FSA for a particular calendar year plan, with 26 biweekly payroll contributions of $57.69. On February 15 of that year, the employee submits for reimbursement $1,000 in qualified medical expenses under the FSA. The employer reimburses the $1,000; however, on March 1 of that year, the employee resigns, having contributed only $230.76 ($57.69 multiplied by four biweekly payroll contributions) toward the annual $1,500 FSA election. The employer has reimbursed the employee $769.24 more than he has contributed year-to-date ($1,000.00 reimbursed minus $230.76 in employee contributions). This amount is not recoverable.

Under existing Section 125 rules, employers assume a level of risk of loss similar to that of the employee; however, employers are still willing to offer FSAs because over the entire plan year, they do not experience a combined total loss when evaluating the plan participants' contributions and forfeitures. Small employers may be more hesitant to offer FSAs because the risk is spread over fewer participants. 

Employers may limit the risk of loss to some extent by implementing acceptable plan designs, such as the following:

  • Lower the maximum reimbursement amount per plan year. For example, change the maximum reimbursement amount allowed to $1,000. This reduces risk by reducing the amount for which employees may be reimbursed.
  • Extend the eligibility waiting period up to 90 days. This may limit risk by reducing the number of participants.  
  • Limit the categories of medical expenses the plan will reimburse.
  • Require advance payment of contributions. For example, instead of permitting monthly contributions evenly over the year, require that 50 percent of the contributions be paid in the first month of the plan year with the remaining percentage paid halfway through the plan year (e.g., January and June). This would apply to all participants, and any unused contributions would need to be repaid to terminated employees. Therefore, if an individual's employment ended in March, and coverage ceased at the end of that month, the contributions paid for April through June must be repaid to the employee.
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