Employer reimbursing eligible FSA expenses only on a contribution basis rather than up-front -- can they really do this?

[Guest SCritchfield]

I have looked and looked and looked... Please help...

Where may I find guidance on the timing requirements of the employer to pay eligible FSA expenses? Is it legal for them to have a "repay-as-you-go" method, like that of dependent care expenses?

According to another post I saw from 01/05/04, it appears that it very well may be IF the employer pays terminating employees upon termination their incurred expense amount up to their annual benefit election. However, how will the employees know they have this coming to them and how will other employees know they are operating the plan in compliance - in other words, how would an employee (or anyone for that matter) know whether or not the employer is complying and bearing the risk since the employees are bearing the "use-it-or-loose it" risk?

Thanks!

[Guest JerseyGirl]

Found in Proposed Treasury Regulation Section 1.125-2, Q&A #7, this is known as the Uniform Coverage Rule.

Simply put, the employer must reimburse for eligible medical expenses up to the full dollar amount of the participant's annual election even if the reimbursements exceed the year-to-date contributions. It is the employer side of the *shared risk* to counter balance the use-it-or-lose-it the employee faces.

This applies to Medical only, not for DCAP.

[papogi]

I read the other post you refer to (1/5/04), and I found it very interesting, as well. It does seem that a twisted reading of the regulations might allow an employer to operate an FSA in this manner (paying out funds to employees in installments, rather than all at once). Treas Reg 1.125-2 Q-7 (b)(2) only requires that funds be “available at all times,” and that employees “must be eligible to receive the maximum amount.” The regs state that “available at all times” means that funds must be paid at least monthly. It does not specifically state that the funds must be paid in their entirety to the employee in such and such a time frame. Technically, a plan operating this way is still saying that employees are “eligible to receive the maximum amount,” albeit on a drawn out schedule. As long as terminating employees are justly reimbursed a lump sum representing the outstanding amount due to them from the employer, then the risk-shifting regs are being followed, or so it would seem. I can see how one could arrive at this conclusion.

In a sense, employees never really know if their employer’s 125 plan is in compliance. They see how the plan document is written regarding status changes, reimbursement procedures, etc. and have to assume that these provisions are being applied, and are being done uniformly. The provision regarding terminations is no different. If it is in the plan doc, aside from interviewing all employees about all provisions, an employee must simply assume that the employer is following the plan doc.

If a plan operates this way, I would think that the EOB should state the total amount eligible to be reimbursed. That’s what the employee can use to make sure that he/she received that entire amount following termination.

With all this said (I played devil’s advocate here a bit), my personal opinion is to avoid operating plan this way. I feel that it goes against the intent of the legislation, could be outlawed if the issue is pushed in court, and would then require plan document rewrites and employee recommunication, as well as potential fines (very highly unlikely, however).