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FSA - How much must be reimbursed to terminated employee


Guest jvanheyde

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Guest jvanheyde

I'm having a discussion with our new HR director and we have a difference of opinion on the amount to which a participant in a Section 125 Plan FSA is entitled to if and when the participant terminates employment. Don't worry about COBRA for these purposes.

Assume Participant ("P") elects $2,400 of coverage on day one (January 1) of the plan year and will have $200 of compensation withheld from his paycheck on the last day of each month. As of March 31, P has had $600 of compensation withheld, and incurred no claims. On April 17, P got very ill because he owed so much in taxes, and incurred the full $2,400 of medical claims. Assume the claims will not be submitted until May.

Now, here is where I'm having a dispute or difference of opinion. My HR director agrees that if P continues to work for the employer and submits the claims for the April 17 services in May, the employer must reimburse the full $2,400 even though at the time of the claims submission in May, only $800 has been withheld. However, the HR director says that if P terminates employment on April 20 and then submits the claim in May, the employer "must" only reimburse the sum total of the year to date withholding ($600 - 3 months @ $200). Her position is that you can treat a terminated participant different than an active participant with respect to a claim that was clearly incurred while P was an active participant, if the claim is submitted after the termination of employment. Her position draws a distinction as to when the claim is presented (i.e., while employed or after termination), even though the claim was incurred while P was an active participant in the plan.

This evidently is the position of a national section 125 administrator. To me, it guts out the concept of a risk shift if the employer's potential liability is mitigated in this manner when the employee terminates. To me, it seems that all that matters is when the claim was incurred, and it does not matter if P was an active participant or terminated participant when the claim is submitted.

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If you are reporting correctly and I am reading you correctly, your HR director is wrong. You are correct that it would make mincemeat of the uniform coverage rule. I would say something unkind about the national administrator, but I have doubts that it agrees with your HR director.

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I also agree. As long as the eligible expense in incurred while covered it cannot be treated differently and must be reimbursed to the full $2400 regardless of how much was contributed by the employee.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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  • 1 year later...
Guest jgarber

I hate to resurrect this issue, but in this case where the employee terminated, would you withhold the remaining election ($1,800) from the employee's final paycheck?

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No.

What would give the employer the right to withhold an amount in excess of the "per pay period" amount stated on the Salary Reduction Agreement?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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The PD can be written in such a way as to allow the ER to minimize the risk of loss by withholding the remaining balance due for COBRA from the final paycheck. Assuming no conflict with state/local laws with respect to payroll withholdings.

It is impossible for the ER to eliminate 100% the risk of loss in the Medical FSA. It is the intent of the regs for the ER/plan to bare some risk of loss. If the risk is eliminated, the plan does not comply.

The size of the organization administering the plan bares no relationship to compliance. Some of the big players administer 125's in a way that eliminates the risk referred to in the regs and are never the less out of compliance. Not everyone plays by the rules. Some believe they're above the rules.

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How can the employer withhold for COBRA if the employee has not elected COBRA?

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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When the cobra election is made the 3 payment options for Medical FSA are

1. withhold from the final paycheck

2. allow cobra participant to issue a personal check or a combination of 1 & 2 the two

3. pay monthly FSA cobra payments

Without the option to withhold from the final paycheck, the tax savings benefit is lost, which is the sole benefit participation in the FSA provides. It provides incentive to continue participation on a post employment basis while maintaining tax savings. The option reduces the incentive to spend the annual elected amount before termination, helps avoid forfeiture for those with expenses after termination, while maintaining the tax savings benefit.

How can the employer withhold for COBRA if the employee has not elected COBRA?

Cobra election by the participant/EE is voluntary. Participant/EE can waive coverage under COBRA.

Cobra compliance by the plan/ER is mandatory. It must be offered to terminating participants/EEs.

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I know very well the procedures involved.

The OP clearly stated " Don't worry about COBRA for these purposes.".

In any case, outlining the options is irrelevant to this thread. The issue is not withholding for post termination participation in the FSA. The issues are :

1. The applicable cut off date for filing claims.

2. Recovering any amount over reimbursed by deducting from the final paycheck.

George D. Burns

Cost Reduction Strategies

Burns and Associates, Inc

www.costreductionstrategies.com(under construction)

www.employeebenefitsstrategies.com(under construction)

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