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Uniform Coverage Rule in FSA


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35 replies to this topic

#1 Maggie6561

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Posted 18 November 2006 - 05:06 PM

I understand that if an employee leaves with a negative balance in their Health FSA (i.e. has been reimbursed more than they have contributed), that is the employer's risk under the uniform coverage rule. However, the boss is insisting that we amend our plan to require employees to have this withheld from their final paycheck. The boss also wants to issue 1009s to employees who have left in this situation, for the amount they were "overpaid." I know none of this is allowed, but navigating the IRS site to find the actual documentation is a nightmare. Anyone have a link handy, or some good resources I can cite? Thanks!

#2 papogi

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Posted 20 November 2006 - 10:02 AM

I don’t think I’ve ever seen it explicitly written in IRS regs that an employer cannot withhold these monies from a terminating employee. Hopefully, someone else can chime in if they have anything better to add. I would point out that if your boss wants to do this, he should do it for regular health insurance, as well. If he only withheld $1,000 in “premiums,” but paid out $5,000 in benefits, he should make the employee pay back $4,000. I’ve never seen it explicitly written in any regulations that an employer can’t do this, either. Of course, I’m not actually saying your boss should do this, but this is essentially what he is proposing. The whole reason that flex plans enjoy tax benefits (first, the payroll deduction is pre-tax, second the pay outs for the FSA are tax free), is because the IRS categorizes the thing as “insurance.” Insurance only exists when a risk-shifting occurs. If your boss removes the risk on the side of the employer, there is no “insurance,” and this would not be a qualified plan under Section 125.

#3 leevena

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Posted 20 November 2006 - 12:17 PM

The employer cannot withhold from the pay any dollars to cover a short FSA account. This is a risk that the employer assumes when offering such a benefit. I would suggest you ask your administrator for the documentation, they should have it available.

#4 Guest_named_mjb_*

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Posted 20 November 2006 - 06:46 PM

See prop reg 1.125-1 Q 7: FSA will not qualfiy for tax favored treatment under IRC 105 or 106 if the effect of the reimbursement arrangement eliminates substantially all of the risk of loss to the employer maintaining the plan.

Edited by mjb, 20 November 2006 - 06:47 PM.


#5 papogi

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Posted 21 November 2006 - 08:53 AM

It's 1.125-2. mjb, that's a good cite, and probably the closest thing to what the poster asked for.

#6 Heather Sachs

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Posted 06 December 2006 - 11:26 AM

I use EBIA books. It's a subscription so it can be kind of costly. I don't how comfortable you are with your boss but could you play devil's advocate and ask him " if a person was to leave with money in the plan that they never claimed, are we going to give it back to them ? " Chances are, he'll say no.

You can even "Google" it to see what you find. But if his plan were ever audited, he's in big trouble and it only takes 1 employee who knows the rule to report the company and pandora's box could open. Does he really want to risk it ? Besides, his FICA savings should help to offset and loss on the plan.


Does the company have any kind of legal council that he'd be willing to ask that question to ?

#7 AHayhow

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Posted 08 January 2007 - 01:56 PM

What about if the employee doesn't leave with a negative balance, but has a negative balance and wants to make a change in the election due to a qualified change in status? For instance, if an employee elects $1,000 on an annual basis, has claimed $700, gets a divorce and wants to reduce her annual election to $500. Can this be done? In essence it would leave the plan with a -$200 on this account. Thanks

#8 papogi

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Posted 08 January 2007 - 03:05 PM

Yes, as long and the plan allows changes to elections, and the change satisfies the consistency rules, it can be done. Actually, the participant still has access to $1000 with dates of service prior to the status change, so the plan could get stuck with as much as -$500. That's how it goes.

#9 jgarber

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Posted 12 January 2007 - 12:14 PM

I am being told by the TPA that my former employer has every right to withhold the negative balance from my final pay and they did so when I left them over the summer. The response from the TPA is that the policy (to withhold any negative balance from the final pay) just has to be stated in the HR policy and can not be discriminatory. It is not part of the actual plan document. She also indicated that TPA's vary on their position with respect to this issue. Can't help but think, why wouldn't all employers have this as part of their HR policy? This could effectively eliminate all risks of offering such a plan unless someone's final paycheck was less than the negative balance.

#10 papogi

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Posted 12 January 2007 - 01:55 PM

Section 125 is based partly on regulations that are still technically "proposed," and many employers take the stance you mentioned because of that, and they bend the rules to benefit themselves. It goes against what most people (including courts, in my view) would think the intent and spirit of the IRS language is, however. The Plan Sponsor is ultimately responsible for the plan, and the TPA would certainly take that stance if the IRS ever audited this plan. The TPA's opinion on this has no more value than the opinion of the Plan Sponsor, and the TPA may be wrong here (I'm one who thinks so). The employer is banking on you not being willing to spend the money to take them to court. My feeling is that you would win, however. Of course, my disclaimer: I am not suggesting you take them to court, but am expessing only my own opinion :)

#11 QDROphile

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Posted 12 January 2007 - 03:36 PM

The IRS has a bounty program. I have never checked into what it covers.

#12 Maggie6561

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Posted 29 January 2007 - 09:58 AM

I use EBIA books. It's a subscription so it can be kind of costly. I don't how comfortable you are with your boss but could you play devil's advocate and ask him " if a person was to leave with money in the plan that they never claimed, are we going to give it back to them ? " Chances are, he'll say no.

You can even "Google" it to see what you find. But if his plan were ever audited, he's in big trouble and it only takes 1 employee who knows the rule to report the company and pandora's box could open. Does he really want to risk it ? Besides, his FICA savings should help to offset and loss on the plan.


Does the company have any kind of legal council that he'd be willing to ask that question to ?



The auditor is saying that this is is taxable to the employee. The organization is a small non-profit and the boss has a history of thinking certain employment related laws are "ridiculous" and essentially ignoring them. I'm trying to put IRS language in front of him and trying to get him to understand the risk. Not having a lot of success - January 31 is two days away and he's still insisting we send a 1099.

#13 Maggie6561

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Posted 29 January 2007 - 10:36 AM

I am being told by the TPA that my former employer has every right to withhold the negative balance from my final pay and they did so when I left them over the summer. The response from the TPA is that the policy (to withhold any negative balance from the final pay) just has to be stated in the HR policy and can not be discriminatory. It is not part of the actual plan document. She also indicated that TPA's vary on their position with respect to this issue. Can't help but think, why wouldn't all employers have this as part of their HR policy? This could effectively eliminate all risks of offering such a plan unless someone's final paycheck was less than the negative balance.



This is correct, IF the plan document states this policy. The employer may mitigate the risk by requiring all participants to pay the annual election amount - even if such a participant terminates. This provision must be applied uniformly, however. In other words, a company may not collect from the last paycheck of only those participants who have a “negative” balance. In such a plan design, they would collect the remaining annual contribution from any terminating employee - regardless of claims to date.

#14 murrr77

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Posted 20 February 2007 - 08:39 PM

Hello, I'm new to this board but have a question. I terminated from my employer this year (2007) and had used all of my 2007 Flexible Spending Election. I just received a letter from my former employer saying I have been over-reimbersed and have two options to re-pay: check or continue flexspend through cobra.

I contacted my state department of insurance (nebraska) and they referred me to the Employee Benefits Security Administration of the US Department of Labor. I called them today and they said it is the employer's right to get the money back.

So, I'm confused at this point, most of what I have read online says I am not responsible because it doesn't say anything about this in the plan handout. Should I contact the IRS for more info? Or will I need to get a lawyer? It is a lot of money, $2400 (I had planned laser eye surgery when elections were taking place). I am afraid if I just ignore the letter it could end up in collections and don't want that to happen.

Suggestions?

Thanks in advance...

#15 papogi

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Posted 21 February 2007 - 09:29 AM

Section 125 says that flex plans are for employees, but proposed regs say that “employees” can include former employees. It is partially due to this ambiguity that some employers collect FSA monies from terminated employees. It can be argued that an employer has no right to collect these monies, since it reduces the employer’s risk in the deal, and could disqualify the plan in the eyes of some courts. I am of this opinion. Either way, this is ultimately a matter of plan design, and should be spelled out in the plan. Note that if an employer decides to collect money from mid-year terminated employees, they must collect FSA money from all of those terminated people. They aren’t allowed to collect it only from those people who have “overspent” their FSA’s, and forget about those people who have underspent. Under no circumstances can the provision (which needs to be in the plan document for the employer to enforce) be applied in a manner which is dependent upon individual claims histories of terminated employees (i.e., discriminatory). The fact that your letter says that you have overspent your account (and pointed that out to you) indicates that they might not have sent the letter to you if you had underspent. That is a real problem, and suggests discrimination.

#16 TXCafe

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Posted 21 February 2007 - 09:29 AM

Are they saying you were over-reimbursed because of incorrect reimbursement or something to that affect? Or are they saying they paid you your full annual election and now want it back because you terminated employment? I can't believe EBSA would condone the employer demanding repayment if it was simply Uniform Coverage in action. I don't really have a suggestion but think it would clarify the situation quite a bit to know why the employer says that. Also, I would get it in writing from the EBSA or wherever IF you can.

#17 murrr77

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Posted 22 February 2007 - 10:29 PM

Are they saying you were over-reimbursed because of incorrect reimbursement or something to that affect? Or are they saying they paid you your full annual election and now want it back because you terminated employment? I can't believe EBSA would condone the employer demanding repayment if it was simply Uniform Coverage in action. I don't really have a suggestion but think it would clarify the situation quite a bit to know why the employer says that. Also, I would get it in writing from the EBSA or wherever IF you can.


I'm saying I had an allowed medical claim (laser eye surgery) after the first of the year and then terminated. The plan administrator, PayFlex, reimbursed me for the claim up to my annual election. I recently received a letter from my former employer (not PayFlex) requesting payment for the difference in what I had contributed and what I was reimbursed before termination. The letter says I can either repay by check/money order or by joining COBRA. And I actually jsut recieved the COBRA papers and it only has down that I can take dental, not flexible spending (I didn't take medical this year).

I did call the IRS and they said it was a legal matter and woudl not involve them, which I was surprised since it involves thier rules (correct?)

#18 leevena

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Posted 23 February 2007 - 12:05 AM

The employer cannot require you to repay the money. Now, you may run into problems, and depending on the amount you may end up paying it back. For example, what if they inititate legal action and you determine it's cheaper to pay then to defend. But the bottom line is the employer cannot require re-payment.

#19 oriecat

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Posted 23 February 2007 - 05:16 PM

The COBRA notice is correct. Flex COBRA is only available if you have a balance to use up. Since you were already reimbursed for your full annual election, there is nothing for you to gain by electing COBRA, therefore it isn't required to be offered.

I have often seen things that suggest that employers can always ask for the overspent funds to be returned, but they don't have any actual recourse to get it. It's possible they are just bluffing and seeing if you will send it. Many employees probably don't know that they aren't required to pay it back.

#20 murrr77

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Posted 23 February 2007 - 05:29 PM

Do you suggest just ignorning the letter or sending some sort of response back quoting Sect. 125 of IRS code?

I also tried to move my 403b yesterday, only to find out from the financial company administering it that once they release my term paperwork I have to fill out and send back to my ex-employer, who then will send back to the financial company holding the 403b and I will be issued a check. Not sure if the check goes through my former employer or not too. It just seems like they are making it hard to leave - and I am wondering if they will drag thier feet or anything on the 403b since I haven't paid on the Flex. Also hoping the check is in my hands promptly so I don't risk being taxed by govt. if not deposited into an IRA within 60 days of issue.

#21 leevena

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Posted 23 February 2007 - 05:47 PM

I can only comment on the FSA part of the question. Whether you ignore it or not, is up to you. My suggestion would be to send them a polite letter informing them that you are under no legal requirement to reimburse them. I would also include a comment that the IRS does put the employer at risk for such incidents.

Good luck.

#22 J Simmons

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Posted 23 February 2007 - 07:02 PM

As a previous post in this thread explained, a flex plan can be drafted to provide that the remaining annual cost of an elected flex will be collected from the employee who departs mid-year. If so, it must be applied to all who leave mid-year, regardless of the claims experience against that flex account from the first of the year. For example, if two employees both elect $1,200 flex accounts for the year, both leave after 3 months (and $300 has been deducted from the paychecks of each), but one has used $1,000 of the flex in claims and the other has used $100 of her flex in claims, the plan must pursue them both for the $900 remaining of the annual cost, and must do so with equal vigor. At least this is what Harry Beker informally opined several years back.

A plan cannot go after the one employee for $700 ($1,000 of claims paid less $300 paid to point of termination), which is the scenario your murrr77 explains: employer "requesting payment for the difference in what I had contributed and what I was reimbursed before termination".

I would suggest you ask for the plan documents, the plan summaries, and specific reference to the provisions that the employer claims to be relying on in asking you for payment.

As for the 403b, if the employer were to monkey with that because of issues about the flex, the employer would likely be opening itself up to significant enforcement and civil penalties.
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#23 leevena

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Posted 24 February 2007 - 01:03 AM

J Simmons. I do not pretend to be an expert about these plans, but if you look at IRS Regulation section 1.125-2, Q&A Answer 7(b)2, it states that the employer cannot ask for the money back. It even goes so far as to say the employer cannot even accept the money. The health fsa must be available at all times during the participants coverage period. This is off-set by the year end use it or lose it rule.

#24 J Simmons

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Posted 25 February 2007 - 12:11 AM

leevena, the example I showed does not have the employer asking for the extra reimbursement 'back'. That would be asking for $700 from just the one employee in my example, the one that had been reimbursed $1,000 but only paid $300 through payroll reductions by the time of employment termination mid-year. That, I agree, would be improper assessment based on the claims experience, belying the necessary risk-shifting element.

Rather, if the plan provides the employer may require every employee who quits mid-year to finish paying the annual cost of health flex plan elected by that employee. That's why each of the employees in my example would have to be pursued for the remaining $900 after having paid just $300 of the $1,200 cost of the annual flex elected. A plan doesn't have to include such a provision, but if it does, it must collect the remainder of the elected annual 'cost' from every employee who quits mid-year, whether the employee is 'ahead of the game' or behind it at the time of employment termination.

Edited by J Simmons, 25 February 2007 - 12:12 AM.

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#25 QDROphile

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Posted 26 February 2007 - 11:33 AM

JSimmons:

I did not see any prior explanation that supports propriety of collecting amounts for the portion of the year after termination of employement and coverage. I saw an unsupported assertion to that effect and I saw more arguments against, with citation to authority against. Perhaps you could explain and clarify what you claim is possible and compliant.