Flexible Spending Accounts - Recovering Money From Terminating Employees

[Guest dywoody]

In my experience, and it is my understanding, that if an employee terminates their employment and have claimed more money from their flexible spending account than they have contributed then that is the end of it. By the same token, if an employee contributes money to their FSA all year long and has no claims while they are enrolled in the plan and then quits before year end then the money is left in the plan.

The company where I am now employed has a policy that an employee who terminates and has not contributed enough money to their flexible spending account to cover their claims must repay the money in their final paycheck. However, if vice versa is true and money is unclaimed in the account then the employee has to leave the money. This just seems wrong to me and I have argued using all of the documentation I can find - Q&As on the final IRS regs for cafeteria plans, commentaries, etc. but payroll argues that the company still has a risk because of the employee who will leave with big claims and money that can't be recovered in the last paycheck.

Now, I am hearing that large companies - for example, MCI - has the same policy. Does anyone have anything definitive on this issue other than just an opinion - that is, something that says, "an employer cannot require an employee to pay back monies they have claimed against their Flexible Spending Account if their contributions don't equal their claims."

Thanks in advance.

[WDIK]

A couple of prior discussions:

http://benefitslink.com/boards/index.php?showtopic=24743

http://benefitslink.com/boards/index.php?showtopic=25575

[Lisa Hand]

Prop. Treas. Reg 1.125-2 Q/A- 7(a) details that health FSAs must "exhibit the risk-shifting and risk-distribution characteristics of insurance."

The final sentence reads:

"A health FSA will not qualify for the tax-favored treatment under section 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..."

Section (b) details Uniform coveage and states "The maximum amount of reimbursement under a health FSA must be available at all times during the period of coverage." and states "...the payment schedule for required premiums for coverage under a health FSA may not be based on the rate or amount of covered claims incurred during the coverage period."

Hope that helps.

[Guest dywoody]

Thanks so much for the responses. My company has decided to change their policy on recovering money from terminating employees for FSA claims exceeding contributions. However, with all of the documentation given to the powers that be they still believe the information to be ambiguous.