flexible spending account question-husband laid off

[Guest teresakelli]

My own accountant doesn't know the details on this.

My husband just found out that because of budget cuts, he is laid off. We had signed up for quite a bit of money to be put into the flex account and have been using it to pay for our daughter's orthodontia bills. A friend of mine tells me that she thinks his employer is responsible for the deficit, because of the one year contract we signed, even though the account will have created a negative balance.

I contacted his employer and they tell me that even though he'll continue to get paid through August, the flex account will shut down next month and there's nothing we can do and that they aren't responsible for the deficit.

I'd appreciate any guidance you can give me on this.

Thanks very much.

[Mike Preston]

If the ortodontia bill was legit (that is, it was an invoice for services actually rendered, rather than an invoice for services to be rendered in the future) The employer is wrong. You need to gently move up the ladder from the individual you spoke with until you find somebody who knows a bit more about how a medical flexible spending account is supposed to work. You might want to find out who they use for an outside advisor and talk to them. Of course, it may not be possible to get that information.

If the bill is for services to be rendered after date of termination, then you need to get your hands on the document that controls the plan (generally known as the "Plan Document") as that can have varied rules with respect to what happens to covered services incurred after date of termination, but prior to the end of the annual period. It can also have provisions affecting the continued payment of "premiums." Further, there might be some COBRA issues involved.

Finally, my understanding of cafeteria plans is a bit dated and without doing research the above is my opinion.

Maybe somebody who deals with these things day in and day out can clarify a bit more.

Good luck.

[Mary C]

The way flexible spending accounts work under the regulations is that the entire amount to be deducted during the year MUST be available to reimburse expenses from the first day of the year. That means if the expenese were incurred on day two of the plan year, the employer is responsible for reimbursing up to the full yearly amount BEFORE the deductions are taken from payroll.

However, the services must have been received while covered. Most plans will only reimburse you for expenses while you are employed and contributing to the plan. You will need to get a copy of the SPD to see how long after he terminates you have to submit bills for reimbursement of the expenses incurred while he was employed.

Orthodontia costs are typically for an entire span of treatment and part of the up front cost is attributable to future, on-going visits. Recent guidance from the government concerning this type of reimbursement is that the cost is reimbursable as visits or treatment is incurred, that is the entire cost is pro-rated over the expected treatment period and reimbursed as services are received.

Finally, if you husband is continuing to be paid through August, and they take deductions out of his check through that time, then the account cannot be "shut down" next month as long as they are taking money from him.

[Jbentz]

I agree with Mike and Mary: gently move up the ladder and get your hands on the plan document. It sounds like you have a rep who is trying to save the company money or is not trained well on spending accounts.

I would also be questioning your COBRA rights under the plan. If you have a deficit, the company has to offer you continuation. Mary, Mike, am i correct on this? You would not be saving on taxes on the premium you would pay out after the termination date, but it would allow you additional visits with the orthordontist to recoup your money.

It sounds like you set the plan up specically for the orthodontia, but don't forget you can use it for any medical expenses. I would suggest going through your receipts for the year and claiming any other expenses you have. The little things add up to big money sometimes.

[papogi]

Flex COBRA should be offered for the remainder of the plan year if the employee has put more into the account than what has been reimbursed out to the employee. COBRA need not be offered after the plan year in which the termination occurs if the FSA is exempt from HIPAA and if the employee will put more into the account than they will get out. The usual 2% admin fee guarantees that the employee will put in more than they get out next year. And the FSA is exempt from HIPAA if the employer offers other health coverage which is not exempt from HIPAA and the maximum reimbursement from the FSA is not greater than two times the employee's salary reduction election (or if greater, the employee's salary reduction election plus $500). Jbentz is correct that you would lose your tax benefit by funding with post-tax dollars. There are two main reasons to elect flex COBRA, and they may apply to you. First, electing flex COBRA may allow you to compile receipts with dates of service after the term date in order to submit them, clear out the account, then cease flex COBRA payments. Second, you may want to continue the account to the end of the year, even though you will have put more into the account than you got out (because of the 2% admin fee). You will have to calculate if you stand to lose more now by not electing flex COBRA, or if you stand to lose more by paying the admin fee for several months. You still lose in this example, but you limit your losses. You would use this avenue especially if you expect reimbursable expenses toward the end of the year.