Health care FSAs involve insurance-type risk
Issue:

An employee elected a health care flexible spending account (FSA) in the amount of $3,000, which was to be funded throughout the year by 26 payroll deductions. In January, the employee incurred, and was reimbursed for, $2,500 in medical expenses. In February, he incurred additional expenses, and was reimbursed for the remaining $500. Then, in March, the employee terminated his employment. Can his employer recover the remaining premium?
Answer:    

No. This situation is covered by the "uniform coverage rule" in IRS Proposed Reg. §1.125.5. The uniform coverage rule, applicable to Sec. 125 health FSAs, states that “the maximum amount of reimbursement from a health FSA must be available at all times during the period of coverage.” Thus, the amount of reimbursement cannot relate to the amount that has been contributed, and the payment schedule under a health FSA may not be based on the rate or amount of covered claims incurred during the coverage period. Employees' salary reduction payments may not be accelerated based on employees' incurred claims and reimbursements. Note that the uniform coverage rule applies only to health FSAs; it does not apply to FSAs for dependent care assistance or adoption assistance.

Thus, if an employee terminates employment before the period of coverage ends and the employee already has incurred claims up to the maximum reimbursement, the employer may not recoup any remaining premium.

A new provision in the 2007 regulations is also worth noting. It requires a cafeteria plan to pay an employee whose participation ends before the end of the plan year any amount the former participant previously paid for coverage or benefits for the period from the date the employee ceases to be a participant through the end of the plan year.

For example, assume an employee has elected to save $1,200 in a health FSA for the plan year and the employer requires that the entire election be salary reduced by the end of March (“front loading of contributions”). The employee terminates employment on June 30 at which time he has submitted claims only for $300. The employer is obligated to refund the $600 balance, which accounts for contributions attributable to the period from July 1 through the end of the year. Employees who wish to continue their Sec. 125 plans may do so under the COBRA continuation of coverage rules in Reg. Sec. 54.4980B-2.

Source: Spencer’s Benefits Reports, Report 351.-21, Sec. 125 FSAs May Be Used To Reimburse Medical, Dependent Care, And Adoption Expenses Pretax.
[ Return to top of document ]