Dep care FSA claims after termination of employment

[Guest Lynnemarie]

Several TPAs have told me that a former participant in a dep care FSA (employment terms mid-year) with an unused balance at date of termination can continue to file for claims incurred after the term date for the unused balance, to end of plan yr.

For health care FSA, have to go on COBRA, make after-tax pmts., etc.

What differentiates this in Sec. 125 (or 129)? In other words, why not let the health care FSA participant just continue to file claims incurred after term. date without bothering with COBRA?

Most docs we have reviewed or written state participation ends at term of employment.

Thanks.

[papogi]

A DC account does not have the requirement to share risk, so many plans allow claims to be subitted and paid with service dates after a termination. A HC account, on the other hand, has to act like insurance, and the common interpretation of that would mean that claims can only be paid with service dates up to the term date. To allow claims after that would remove a big piece of the employee's risk, and many feel that this is against the IRS' intention in the legislation.

[Kirk Maldonado]

papogi:

This is a minor point but comes up often.

The IRS does not enact legislation. That is done by Congress. While representatives of the IRS may give some input on the way that they think that the proposed legislation should read, the ultimate decision is made by the House and the Senate.

The IRS does issue regulations which act as the official interpretation of the statutory provisions of the the Internal Revenue Code. But the IRS is generally limited by the terms of the statutory language. Stated in a different manner, while the regulations can set forth how the IRS believes that the statutory rules shold apply in a particular situation, the regulations cannot override the language of the statute.

In this case, the requirement that the health care flexible spending accounts function like insurance policies is found in the regulations under section 125 of the Interna Revenue Code, not in the statutory provisions.

[papogi]

Agreed. The IRS does not actually enact the legislation. I was not a careful in my wordsmithing