Terminating my employment mid-year; can't I draw health expense reimbu

[Guest mam]

I have given my nitice to leave my current job, and my last day is June 30. The 125 Plan Year at my employer is 1/1-12/31. The employer has informed me that the amount in my account on my last day of employment must be forfeited. I've spoken with several Human Resource professionals who've told me this is not legal. They say that i am eligible by law to continue to draw from the account until the end of the year. Who is correct? thanks for the help!

[Joe Priselac]

Mam,

I assume you are referring to your health FSA

account. Any eligible expense incured while your were still employed would be eligible for reimbursement up to the original amount you had elected in December minus any previous reimbursements. A plan can limit the time allowed to submit expenses after termination to a period like 60 or 90 days, but the plan could allow former participants to submit claims incurred before termination all the way to the standard runout after the plan year end. Expenses incurred after June 30th in your case would not be eligible for reimbursement unless you exercised your right to continue participation under COBRA. They are going to give you a proper COBRA notification spelling out your rights, I assume??? I hope this clarifies things a little for you.

[Guest Matt J]

Are the rules the same for a Dependent Care Reimbursement Accounts? That is to say, can an employer limit the time that a participant may submit a claim after termination for Dependent Care related expenses?

[Lisa Hand]

The close-out period is normally for all benefits within the plan. You should check your plan documents.

[Guest Lee Ann Jenkins]

Originally posted by Lisa Hand

The close-out period is normally for all benefits within the plan.  You should check your plan documents.

Can a Plan Sponsor get by with giving no grace period to submit claims incurred before termination? Is it common to give the same grace period as is given after the close of the plan year?

[Guest jgroves]

There is a catch to this, however. Let's say at the beginning of the year you wanted to have all $5,000 taken out and as of June 30 you had put in $2,500. Now lets say in February through March (for example) you had submitted claims for the full $5,000 and received that reimbursement. You are NOT liable for the remaining $2,500 that you owe. The Employer is stuck with the $2,500 deficit. At least that is how I understand it. PLEASE correct me if I am wrong.

[Lisa Hand]

jgroves - just a quick clarification - that applies to the Unreimbursed Medical FSA, not the Dependent Care FSA since Dependent Care is not level funded and therefore you can not get the funds in advance. The most recent responses were asking about the close-out period on Dependent Care, I just wanted to make sure no one got confused.

Lee Ann - As I mentioned earlier, the plan documents should detail the operations of your plan. The plan sponsor is required to provide you a copy of these documents upon request.

Unless specifically stated otherwise in the plan documents, the close-out period is usually the same for terminated as active employees, just the period in which the expenses must have been incurred differ.

Also as Joe mentioned, if your Medical FSA benefit has available credit as of your date of termination and your employer is larger than 20 employees (or voluntarily offers COBRA continuation) then you must be offered COBRA for your Medical FSA. (only the Medical FSA)

[Guest Dick Boever]

Scenario: An employee gives her notice on June 15, files a claim on June 25 for all expenses year to date and then terminates employment on June 30. The medical reimbursement claims filed exceed the deferrals she had at termination. Is she entitled to the full reimbursement or just the amount up to her deferrals? I assume you will reply she is entitled to the full amount.

Assuming she has a 90 day run out period, how does the situation change if the claim is filed on July 3? I believe she now only receives the amount up to her deferrals, as her annual election becomes her deferral amount at termination.

Therefore, can an employer afford some protection by stipulating claims are processed on the day following their paydays, ie. the 1st and 16th of the month? Thus a claim filed on June 25th would be processed on July 1st and the termination would have occurred, reducing the annual election amount.

[Guest Lee Ann Jenkins]

Please let Lisa give you the definitive answer, but I don't believe that you can do what you've described in your last two paragraphs of the message you posted this morning. As I understand it, it doesn't matter when she gave her notice. What matters is her termination date and the amount of her annual pledge not yet reimbursed during her active period of participation. If she has qualified claims with incurred dates prior to her termination date, they must be reimbursed if she submits them during her close out period. Again, if this is not spelled out differently in her company's plan document, it would be assumed that she had the same period of time as active employees to claim her expenses; i.e., until the end of the 12-month plan year plus whatever grace period is given to active employees.

All the above changes, though, if she continues her health care FSA under COBRA. Then, she could submit claims incurred during her period of active participation (whatever she's paid through under COBRA). Lee Ann Jenkins

[Lisa Hand]

Dick:

It doesn't matter when the claim is submitted (June 15 or July 3), it matters when the expenses are incurred. So you should check your plan document and make sure it states that the close-out period for terminating employees is from their date of termination, not the end of the plan year. This limits some exposure, but as long as it is a valid claim, incurred during the period of participation, then it has to be paid up to the annual allocation. For the Medical FSA, if they continue under COBRA then they are still active participants in the plan and expenses can be submitted throughout the plan year. Please note the final COBRA regulations address the issue of who does and does not need to be offered COBRA for their health FSA.

[Guest Rod Steger]

I understand that a terminated employee may submit claims for expenses incurred prior to the date of termination, and that the claims may be submitted up through the plan defined "close-out" period, say 60 days. What I don't understand is why the terminated employee would be entitled to reimbursements in excess of deferrals, e.g. up to annual allocation.

With a continuing employee, claims in excess of deferrals will be made up in future payrolls. When an employee terminates, so do pre-tax deferrals. Isn't the plan, in effect, providing tax free income to the former employee?

Why should't the plan only reimburse up to the amount of deferrals, less previous claims?

Is an IRS rule, or a plan specific rule? Our SPD states:

"Employees who terminate within the plan year and who have balances left in their Medical Reimbursement Account or their Dependent Day Care Account may continue to submit claims for processing for up to 60 days following termination, bu only up to the amount remaining in the account. However, expenses must have been incurred prior to termination".

I have interpreted the "amount remaining in the account" statement to mean deferrals less prior claims. Am I wrong?

[Guest CLKeown]

Rod,

Again, defer to Lisa as the 'final' word here.

However, in the case of Health Care FSA's employees are entitled to recieve reimbursement up to the annual election amount for all eligible expenses. This is regardless of the actual amount deferred.

Health Care FSA plans do carry a funding risk to the employer in the case of an employee leaving mid-year - this is an offset to the potential gain of forefietted funds.

For instance if an employee signs up for $ 5,000 of HC FSA to begin Jan. 1 and on Jan. 15th submits a receipt for LASIK surgery of $ 5,000 performed on Jan. 10th, the employee is entitled to recieve the entire amount (as elected). If the employee terminates in February, there is no recourse for the employer to recoup the money not deferred.

My understanding is that the employer cannot stipulate that the amount available for reimbursements is the amount deferred minus any previous reimbursements. The employer must pay qualified expenses up to the annual election.

I am certain that Lisa will correct me if I am mistaken.

To the best of my knowledge the only FSA for which you distribute based on the amount deferred (less and previous reimbursements) are dependant care FSA's.

Carole

[jeanine]

Would I be correct in interpreting termination to include termination by death as well? Could the surviving spouse continue to submit expenses incurred up till the time of death? The wife and children are included in this plan as well that runs through the end of the year.

[Guest Rod Steger]

Carole:

I agree that your scenario of the employee claiming all $5000 of the annual election in January is proper. The employer's exposure is that the employee terminates later. We follow that procedure. My issue is paying claims in excess of (deferals - previous claims) to a previously terminated employee. In this situation, the employer knows that further deferrals will not occur. Again, it is tax free income to the former employee. One of my benefits coordinators actually called the IRS twice. The first advisor stated that if the employer paid the claim, they should withhold taxes from the gross proceeds. The other advisor stated that the decision on whether to pay in excess of deferrals less claims depended on what the SPD specified.

Can anyone point me to the Code section where this is discussed?

Thanks

[Lisa Hand]

For the Medical FSA, if the expenses were valid and incurred during the "period of participation" and it is still during the plan close-out period, then the claims must be reimbursed up to the annual allocation. It is just like health insurance, if the treatment was given during the time the participant was covered by the plan, the insurance will pay for the treatment. The DCA benefit does not run that way of course.

These rules are why a specific close-out for terminated employees should be in the plan documents and the plan should set a prudent cap on the medical FSA benefit. Submission of claims for a deceased participant should be detailed in the plan documents.

Prop. Tres. Reg. 1.125-1 Q/A-7 is a good place to start reviewing the governing regulations. The varied responses you received from the IRS may be based on how you asked the questions and whether you called the specific section in Atlanta, GA that deals with Section 125 Plans.

Finally, the real issue may be your use of the term "tax defered income", the reimbursements from a Section 125 Plan are NOT income, but rather benefits. That is why the employee does not get the allocations back unless they incur valid expenses and utilize their benefit and also why both employee and employer do not pay taxes on these dollars.

[Edited by Lisa Hand on 09-02-2000 at 01:09 PM]