Terminated Employee

[Guest PORTE]

Can anyone tell me where I can get guidance on how to treat a terminated employee with an overdraft balance in their FSA. They have withdrawn all their funds from the account but not had all withheld yet and we would like to withhold the balance from the final paycheck. Any paragraph quotes would be great or citings.

[papogi]

You will find that it is the opinion of most people in benefits (myself included) that you can't withhold any additional amount from the last paycheck to cover any overdraft. Section 125 requires a risk-shifting in order for it to be classified as a form of "insurance" and then get the tax benefits of such a plan. Taking a big deduction from the final paycheck essentially eliminates the risk to the employer, and would bring the plan out of compliance in my view.

[Guest MSMA]

No, No, No...

You can NOT do this. If you did, you would completely violate the Uniform Reimbursement Requirement that is a vital part of FSA (medical care only) -

From Thompson's manual Section 324 / Tab 300 / page 1

" The full year's reimbursement amount for eligible medical expenses under a health FSA must be available at all times during the year. (Of course, the maximum amount subject to reimbursement during the year must be reduced by any previous reimbursements during the year.) This amount cannot be tied to the contribution the employee had made to the health FSA for the coverage period: not can they payment schedule for the payment of health FSA contributions be based on the rate or amount of covered claims incurred during the coverage period. This prohibits the acceleration of premiums if claims are being incurred faster than premiums are being collected. "

" The uniform reimbursemnt approach places the employer at considerable risk for insufficient contributions by short-service employees. The philosophy behind the uniform reimbursement requirement is to treat health FSA's more like true insurance by shifting the risk to the employer"

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This is why employers are given the ability to set the "cap" of how much can be set aside for a year. We always urge our companies to consider their turn-over rate before setting the cap. If they have a very stable work-force - then caps can be higher...but if employees come and go, a then a much lower cap should be set.

With this in mind, our companies usually end up with EXCESS money that is returned to them....rather than having to pick up the slack when an employee spends more than contributed.

Hope this helps. If you did not know about this most important aspect of administering an FSA - I STRONGLY suggest you get yourself a good reference book (such as Thompsons...but there are other out there too).

[oriecat]

Here's another quote, from one of the various Treasury Regs relating to Cafeteria Plans

http://www.irs.gov/pub/irs-utl/tres_reg-1125-2.pdf Page 6, Question 7

"A health FSA will not qualify for tax-favored treatment under sections 105

and 106 of the Code if the effect of the reimbursement arrangement

eliminates all, or substantially all, risk of loss to the employer

maintaining the plan or other insurer."

[mbozek]

Under the proposed regs the plan must assume the risk of losses which exceed the amount of the employee's contributions.