|Question 21: I just read with interest your response to Question 14 regarding medical reimbursement accounts under a Section 125 plan. If I understand your examples correctly, we have been handling terminated employees improperly. What we have been doing is that if an employee is contributing $100 per month and terminates after six months, then they can submit claims up to $600 for expenses incurred through the end of the plan year, regardless of what date they stopped contributing. If this is incorrect, please advise. Thanks.
Answer: There are a few problems with the way you describe plan operations. Take a close look at the Proposed Regulations: 1.125-2, Q&A 7. In particular, Q&A 7(b)(2), "Uniform Coverage." The first sentence reads, "The maximum amount of coverage must be available at all times during the period of coverage." The period of coverage is generally the entire plan year, but part (b)(3) of the same Q&A 7 explains that the plan may terminate the period of coverage of a person who terminates employment with the company.
A person who terminates employment, and thus ends the period of coverage, still has the full amount available for claims incurred during the period of coverage. For example, if a participant terminates on June 30, and has the remainder of the plan year to submit claims, the claim date of service must have been between January 1 and June 30 of the plan year (assuming a calendar plan).
One last item as to why you should not reset the benefit amount after a participant terminates: 1.125-2 Q&A 7 (a) has a sentance that reads, "A health FSA will not qualify for tax-favored treatment under Sections 105 and 106 of the Code if the effect of the reimbursement arrangement eliminates all, or substantially, risk of loss to the employer maintaining the plan or other insurer."
Incidentally, we would generally only allow a person to continue submitting claims incurred after date of termination if that person were on COBRA continuance. With COBRA, the participant could continue to contribute to the plan and could continue to remain a participant in the plan. Are you aware that COBRA applies to Medical Reimbursement Accounts? COBRA affects companys of 20 employees or more (not 20 plan participants or 20 "insured" employees - just 20 employees!)
Some companies allow an exiting employee to buy several months of COBRA continuance on a pre-tax basis from the last paycheck. Otherwise, an individual must pay from personal after-tax funds and amount equal to 102% of the monthly contribution, to receive an amount that does not include the 2% administrative fee. There is certainly no tax benefit when paying COBRA premiums to a medical reimbursement account from personal funds.
So, here's a bonus Q & A: Why might a medical reimbursement plan participant want to continue on a COBRA basis?
First, to gain access to a medical reimbursement account balance that might have otherwise been forfeited. Lets say that a participant in a calendar year plan puts aside $100 per month for an expected uninsured medical procedure late in the plan year. The employee terminates in June with no medical expenses to-date. In order to gain access to the account balance, the participant would elect COBRA to have the right to submit claims for as long as he/she was on COBRA.
Another reason to elect COBRA is to have access to MORE MONEY than has been contributed to the plan. Here is a worst case scenario for an employer:
An employee who left the company late in the year elected COBRA continuation for the medical reimbursement account. At the beginning of the new plan year, the individual elects to remain on COBRA. He/she makes contributions for a few months and turns in claims equal to the annual benefit amount during his/her COBRA continuation period. When the benefit amount has been exhausted, the individual elects to drop COBRA continuation - leaving the former employer on the hook for funds paid out and not collectable.
You need not be very alarmed by my example. I have seen very few employees elect COBRA continuation for a medical reimbursement account, and have never seen the devious use of COBRA continuation as described above.