Any final payroll deduction recourse for FSA debit due to midyear termination

[Guest cindy27]

We're finding many instances of employees leaving during the year with a debit balance in their FSA. They may have elected $1200 in their FSA, which means a $100/mo payroll deduction, filed claims earlier in the year, and were reimbursed the full $1200. In this scenario, they might have been reimbursed $100 x months not active more than they contributed.

A 1999 article in Benefitslink indicates that an employee may be asked to repay the amount, but, not forced. Is this still the case?

[papogi]

While there are differing opinions out there regarding your issue (largely due to the argument that Section 125 is based on proposed regulations), the prevailing industry opinion and practice, by far, is that the employer cannot get these monies back from terminated employees. Doing so would reduce the risk on the employer’s side that there would not be enough risk-shifting for the benefit to be considered “insurance,” thereby losing its tax-favored status. I am one in that majority view.

Every employer who operates FSA’s in this manner will end up with a number of terminated individuals in this situation. My bet is that you also have a number of participants who forfeit monies at the end of the year due to the use-it-or-lose-it rule. Based on my experience with FSA’s over many years, I would also venture to say that your forfeitures often, if not always, offset your losses, and you end up with an experience gain virtually every year.

[Guest cindy27]

Thanks for your reply, it makes sense. You are correct when you guess that the forfeitures are much higher than the over-reimbursements, but the use-it-or-lose-it rule is well publisized and understood while the outlay for termed employees doesn't seem quite the same. It speaks to working harder on retention, I guess. Happy fourth.