Limiting the liability of Health FSA to the employer.

[Guest Joe Vasko]

I heard that you can establish a plan document that requires an employee to continue to make contributions to their Health FSA when they terminate and their claims have exceeded their contributions to the plan, even if it requires withholding the amount from their last paycheck. Is this true??

[Guest MSMA]

I have never heard of such a thing.

Ways to reduce the risk to the employer is for the employer to (1) include language in the Plan Doc which limits the eligible qualifying events. At this time, the regs seem to give the employer a fair amount of control in this area. Also (2) the employer can set the maximum allowed (cap) at a low amount, keeping in mind that it shouldn't be so low as to eliminate the financial incentive for both employer & employee.

[MGB]

It is illegal to require such payments from the employees.

[mroberts]

It is illegal. I also wanted to point out that it really isn't worth the headache of trying to figure out a way to mitigate your liability on the FSAs. It all balances out in the long run. There are about 1111 studies that point this out. I can see some possible shortages on the employer side with the way the labor market is right now, but things will return to normal shortly.

[Medusa]

At least one local attorney writes their 125 plan this way. Their position is that the election form specifies an annual amount, and the employer may take any remaining balance from the final paycheck, to the extent claims have exceeded contributions to date. I'm not saying this is right or wrong, but the attorney is a prominent one in the benefits area.

[SLuskin]

If you shop hard enough for an attorney, you can find one who will say pretty much anything that you want.

On this point, however, this attorney is incorrect.

[Medusa]

I would love to point that out if you can point me to some specific authority.

[GBurns]

Just point him to the Treas Regs 1.125-2 Q&A 7 in particular (B)(2) Example 2. Or send him to Tax Management Inc Portfolio on Cafeteria Plans or the EBIA Cafeteria Plan Manual.

Better yet let him show the authority that he relies on for his position. It should not be for you to prove him wrong but for him to provide support for any position taken.

[Medusa]

GBurns:

Thanks for the info, but I suspect this attorney will not be impressed with regs that are only proposed, and have been in proposed form for 7 years without any signs of going final.

I looked into this before and could find nothing violating any final regs or other finalized promulgations. This attorney's position is that the requisite risk-shifting still exists, albeit at a reduced level, because there is still a chance that a person's final check won't be high enough to cover reimbursements. There has also been some discussion that a reduction of the person's final check can't reduce him or her below minimum wage.

In any event, I'm not about to take the attorney on without something more definitive to stand on than proposed regs.

[KJohnson]

GBurns--I don't know if I would send him to the Tax Management Portfolio. In their "Communication Material" look at Worksheet 13 Question 15 which states that these amounts can be withheld.

15. What happens if I leave the ABC Corp.?

If you leave the ABC Corp., no money will be put into your Medical Expense Spending Account after your final paycheck. Any claims paid to you from your Medical Expense Spending Account in excess of the amount you have contributed to the plan during the year may be deducted from your final ABC Corp. paycheck.

If you leave the ABC Corp., you may still continue to draw money out of your Medical Expense Spending Account for unreimbursed medical expenses incurred during the plan year until your account reaches a zero balance.

This is not in their sample plan, however.

[QDROphile]

Medusa:

Ask the lawyer for a list of his clients with plans under his design. If he is as good at ethics rules as benefit plan rules, he will give you the list. Then you can report the clients to the IRS, and maybe get a bounty. Alas, the IRS does not enforce much of anything, so rogues abound.

[Medusa]

So far, no one has adequately demonstrated to me that he is incorrect. If I'm going bounty-hunting, I know of several better places to go.

[GBurns]

The difference is in the details.

If the plan is written under Treas Regs 1.105-11 which is titles "Self-insured medical reimbursement plan" then such a procedure is allowed.

However, the post stated that this was done under a section 125 cafeteria plan FSA. There is no provision for an FSA under section 125, it is a provision under the Proposed treas Regs 1.125-2. So if the attorney is going to regard the Prop. Regs as "merely" proposed etc as Medusa states then he has absolutely no authority under section 125 that allows his plan design. You either use the Regs (Proposed or not) or you do not you cannot have it both ways.

In any case, I think this has gone off the track. It is for the attorney to prove his case, for which I am sure that he cannot, ant not for any of us to "adequately demonstrate" to either him or Medusa, as Medusa seems to want.

The problem lies not with us but with the proposer of an unsupported plan design.

[Medusa]

It would certainly make the subject easier to discuss if the regs were final. In the meantime, however, I would be hard pressed to use the word "illegal". I do think it's aggressive, and that the attorney assumes some risks. But then, that's why they make the big bucks.

[KJohnson]

Originally posted by GBurns

If the plan is written under Treas Regs 1.105-11 which is titles "Self-insured medical reimbursement plan" then such a procedure is allowed.

I am not sure I understand how this would arise without a 125 Plan. Would there be any way for an employee to put pre-tax dollars into any type of 105 Plan without a 125 Plan in the first instance?

Also I thought that 1.125-2 Q&A7 which prohibits such an offset applied to all 105 Plans irrespective of whether they are funded through a 125 Plan (although I have always wondered why they put this it in the 125 proposed regs rather than the 105 regs).

[GBurns]

Medusa,

What risk is there that the attorney assumes??

Are you regarding Treas Regs 1.105-11 etc as being proposed?

You seem hell bent on defending this attorney at all costs, rather that thrashing out the issue.

[Medusa]

I won't dignify that comment with a response.

[AmyR]

I am late in seeing these messages, and I don't mean to beat a dead horse, but I too have often wondered about this question for cafeteria plans, as the Sungard Corbel checklist for cafeteria plans offers as an option for terminated employees in a Health Care Reimbursement Plan the ability to "continue contributions and reimbursements for the remainder of the Plan Year".

I have asked them how this interacts with COBRA, and I believe they say that COBRA takes precedence. What good does it do then to have this option? If the employee doesn't elect COBRA, can you still require them to be in the rest of the year? This has never really been made clear to me.

I have some older plans in which we had made this election and I often wonder if they need to be amended. However, I can't imagine anyone as large as Corbel including this in a checklist if it wasn't a valid option. Any ideas as to why this is included in their checklists?

[mbozek]

There may also be an issue of state labor laws which limits how much of an employee's compensation can be reduced for plans not subject to ERISA. E.g., NY labor law regs limit salary reduction to 10% of compensation. If the Cafeteria plan is not an ERISA plan because it pays no benefits subject to ERISA then state labor laws are not preempted. If the Cafeteria plans are subject to ERISA because it is part of an ERISA health plan then state labor laws are preempted. Violation of state labor laws could result in fines and penalties. Also the proposed IRS reg. 1.125-2 A-7(a) state that "a health FSA will not qualify for tax favored treatment under IRC 105 and 106 if the the effect of the reimbursement arrangment eliminates all or substantially all, risk or loss to the employer maintaining the plan or insurer".

[papogi]

AmyR, since a requirement for FSA’s is that the employee has a 12-month plan year, it has been argued in the past that employees continuing under an FSA in the manner you describe don’t really need to be on COBRA until the beginning of the following plan year. Some employers had a policy such as you describe, but the employee has to elect that option, and it is not automatic. At the point of termination, an employee could revoke the election, or opt to continue the account. The advantage to the employee is that the payments can be made without having to pay the 2% admin fee. They lose the pre-tax benefit, but they save the 2% they would otherwise have to pay. An employee who knows that there will be some hefty expenses in the next couple months might want to continue the account to wrap up these expenses, then drop the account.

The new regs concerning COBRA/HIPAA/flex have changed things for most employers. The vast majority of HCFSA’s are not subject to HIPAA. If you offer a comprehensive health plan to your employees, your FSA is not subject to HIPAA. This means that you needn’t offer flex COBRA past the year in which the termination occurs (since the 2% admin fee will mean that the total potential reimbursement will be less than what the employee would put into the account for the year). Concerning the year in which the termination occurs, you only need to offer flex COBRA to a participant if they have not yet been reimbursed an amount equal to or greater than the amount actually contributed to the account by the employee. For instance, if the employee has had no reimbursements, and the account is not funded entirely by the employer, then you would have to offer flex COBRA only up to the end of the current plan year. If an employer allows a terminated employee for whom flex COBRA should be offered to elect to continue the account in the manner you describe, the employer’s responsibility to COBRA should be satisfied. If they make the same offering to an employee who does not have flex COBRA rights (they’ve already taken out an amount equal to or greater than they’ve put into the account), they are being more generous than they need to be, and may set themselves up for losses should the employee clear out their account and stop paying. I think Corbel’s option should be dropped, in favor of the new tighter COBRA rules.

[AmyR]

Thank you for the comments. I did a little further review on Corbel's website and located their commentary on this checklist question.

For the option that says terminated employees with a HCFSA shall continue contributions and reimbursements for the remainder of the Plan Year, the commentary says "this alternative REQUIRES terminated participants to continue in the plan through the end of the Plan Year." However, they follow this up later with a comment that this option "is the best alternative for limiting the Employer's risk of loss. However, the application of COBRA to health FSAs could override options a and b." (a is everyone continue thru end of year an b is everyone cease at term. date).

I guess my question is, if COBRA overrides (and is only required thru the end of the year) and an employee turns down COBRA coverage, are they saying the employer can still require continued participation by term. employees for the period from their date of termination to the end of the plan year? Or, is the employee out at that point? If an employee turns down COBRA coverage and can elect out, what is the benefit in electing this option? As papogi mentioned, at that point, it's like offering everyone COBRA, the only persons who would stay in would be those that have not yet spent their accounts.

A few examples from Corbel on this interaction would be helpful!

[papogi]

The employee's termination is considered a family status change which would allow an employee to make a mid-year change, e.g., terminate the account. Since 125 plans are not required to allow mid-year changes (obviously, most do), theoretically a plan could require that terminated individuals continue their accounts up to the end of the plan year. Corbel's argument for this that it limits the employer's risk of loss is also purely theoretical. Without payroll deductions to guarantee collection of premium, employees could simply refuse to send their checks in, thereby terminating the account. The employer won't go to a collections agency. I would also argue that this limits the employer's risk so much that the risk-shifting requirement would be compromised. The employee's risk is that he/she won't clear out the account by the end of the year. The employer's risk is almost completely removed. I don't see a plan like this being qualified under 125.

I can't see how COBRA would override this, either. The employee can turn down COBRA, but if the plan requires continued participation, they're back in anyway. As far as continuing the account in any manner (COBRA or this unusual avenue we are discussing) there are only two times when it may pay to continue the account. The first one we already mentioned (continue for a couple months, clear out account, then cease contributions). The other is when you make your election based on a large expense to expect towards the end of the plan year. You may have contributed $500 year to date, for instance, and have no claims. You may be better off continuing your account, even though the money is now post-tax and, if through COBRA, subject to the 2% admin fee. You could continue the account up to the end of the year and submit your large bill. Even though you lost money in the account (2% admin fee if through COBRA), you lost alot less than you would have had you not elected to continue ($500).