Health FSA and Layoffs

[Guest Kim Kaczmarek]

I am looking for some guidance on the following:

I have a client who will be implementing a FSA plan 9/1/02. They know that they will be laying off several hundred employees sometime after the implementation of the plan and want to be able to allow participants who are laid off to be able to continue to be "active" and submit claims for expenses incurred after the layoff date. This period may last one month, two months or until the end of the plan year - we are still trying to work the details out. My question is two-fold and really encompasses the health care FSA:

1) Can laid off employees be treated separately from terminated employees? Obviously, the employer knows the risk in allowing participants to continue to submit health care claims incurred during the layoff period, but does not want to open this risk for truly terminated employees.

2) Can the employer choose to allow an extended eligibility period for the laid off employees as long as it is specifically outlined in the PD/SPD? Does it matter that the participant is no longer contributing?

Thanks!

[papogi]

This is an interesting one. There does not seem to be any guidance anywhere in the 125 regs to help. To answer your first question, my thinking is that laid off employees can be treated differently than terminated employees. Second one, extending eligibility without employee contributions does seem to be OK. For example, under FMLA, the IRS says that an employer can require an employee pay his/her share of premium while out on leave, but that the employer can waive this requirement as long as this is done on a non-discriminatory basis. Even though some employees may have only elected $200 for the year and others may have elected $1500, it seems OK to the IRS that the company can pay the premiums for these employees even though the bottom line benefit is different for each different election. This seems odd to me, since employer-funded FSA's normally should be funded as a flat amount for everyone, or based on a percentage of compensation. The FMLA rules infer that the IRS does not mind this disparity, however, so one could apply this reasoning to paying premiums for laid off employees. Again, I see nothing that specifically outlaws this idea, but the lack of guidance makes this somewhat risky.

[mroberts]

Allowing laid off employees to be treated differently than truly terminated employees shouldn't be a problem. However, could you clarify the following points:

1. Will the laid off employees continue to be on the health plan for an extended period of time?

2. How much time will fall between the implementation of the flex plan and the lay offs?