Uniform Coverage Rule in FSA

[Guest Maggie6561]

I understand that if an employee leaves with a negative balance in their Health FSA (i.e. has been reimbursed more than they have contributed), that is the employer's risk under the uniform coverage rule. However, the boss is insisting that we amend our plan to require employees to have this withheld from their final paycheck. The boss also wants to issue 1009s to employees who have left in this situation, for the amount they were "overpaid." I know none of this is allowed, but navigating the IRS site to find the actual documentation is a nightmare. Anyone have a link handy, or some good resources I can cite? Thanks!

[papogi]

I don’t think I’ve ever seen it explicitly written in IRS regs that an employer cannot withhold these monies from a terminating employee. Hopefully, someone else can chime in if they have anything better to add. I would point out that if your boss wants to do this, he should do it for regular health insurance, as well. If he only withheld $1,000 in “premiums,” but paid out $5,000 in benefits, he should make the employee pay back $4,000. I’ve never seen it explicitly written in any regulations that an employer can’t do this, either. Of course, I’m not actually saying your boss should do this, but this is essentially what he is proposing. The whole reason that flex plans enjoy tax benefits (first, the payroll deduction is pre-tax, second the pay outs for the FSA are tax free), is because the IRS categorizes the thing as “insurance.” Insurance only exists when a risk-shifting occurs. If your boss removes the risk on the side of the employer, there is no “insurance,” and this would not be a qualified plan under Section 125.

[leevena]

The employer cannot withhold from the pay any dollars to cover a short FSA account. This is a risk that the employer assumes when offering such a benefit. I would suggest you ask your administrator for the documentation, they should have it available.

[Guest mjb]

See prop reg 1.125-1 Q 7: FSA will not qualfiy for tax favored treatment under IRC 105 or 106 if the effect of the reimbursement arrangement eliminates substantially all of the risk of loss to the employer maintaining the plan.

[papogi]

It's 1.125-2. mjb, that's a good cite, and probably the closest thing to what the poster asked for.

[Guest Heather Sachs]

I use EBIA books. It's a subscription so it can be kind of costly. I don't how comfortable you are with your boss but could you play devil's advocate and ask him " if a person was to leave with money in the plan that they never claimed, are we going to give it back to them ? " Chances are, he'll say no.

You can even "Google" it to see what you find. But if his plan were ever audited, he's in big trouble and it only takes 1 employee who knows the rule to report the company and pandora's box could open. Does he really want to risk it ? Besides, his FICA savings should help to offset and loss on the plan.

Does the company have any kind of legal council that he'd be willing to ask that question to ?

[Guest AHayhow]

What about if the employee doesn't leave with a negative balance, but has a negative balance and wants to make a change in the election due to a qualified change in status? For instance, if an employee elects $1,000 on an annual basis, has claimed $700, gets a divorce and wants to reduce her annual election to $500. Can this be done? In essence it would leave the plan with a -$200 on this account. Thanks

[papogi]

Yes, as long and the plan allows changes to elections, and the change satisfies the consistency rules, it can be done. Actually, the participant still has access to $1000 with dates of service prior to the status change, so the plan could get stuck with as much as -$500. That's how it goes.

[Guest jgarber]

I am being told by the TPA that my former employer has every right to withhold the negative balance from my final pay and they did so when I left them over the summer. The response from the TPA is that the policy (to withhold any negative balance from the final pay) just has to be stated in the HR policy and can not be discriminatory. It is not part of the actual plan document. She also indicated that TPA's vary on their position with respect to this issue. Can't help but think, why wouldn't all employers have this as part of their HR policy? This could effectively eliminate all risks of offering such a plan unless someone's final paycheck was less than the negative balance.

[papogi]

Section 125 is based partly on regulations that are still technically "proposed," and many employers take the stance you mentioned because of that, and they bend the rules to benefit themselves. It goes against what most people (including courts, in my view) would think the intent and spirit of the IRS language is, however. The Plan Sponsor is ultimately responsible for the plan, and the TPA would certainly take that stance if the IRS ever audited this plan. The TPA's opinion on this has no more value than the opinion of the Plan Sponsor, and the TPA may be wrong here (I'm one who thinks so). The employer is banking on you not being willing to spend the money to take them to court. My feeling is that you would win, however. Of course, my disclaimer: I am not suggesting you take them to court, but am expessing only my own opinion

[QDROphile]

The IRS has a bounty program. I have never checked into what it covers.

[Guest Maggie6561]

I use EBIA books. It's a subscription so it can be kind of costly. I don't how comfortable you are with your boss but could you play devil's advocate and ask him " if a person was to leave with money in the plan that they never claimed, are we going to give it back to them ? " Chances are, he'll say no.

You can even "Google" it to see what you find. But if his plan were ever audited, he's in big trouble and it only takes 1 employee who knows the rule to report the company and pandora's box could open. Does he really want to risk it ? Besides, his FICA savings should help to offset and loss on the plan.

Does the company have any kind of legal council that he'd be willing to ask that question to ?

The auditor is saying that this is is taxable to the employee. The organization is a small non-profit and the boss has a history of thinking certain employment related laws are "ridiculous" and essentially ignoring them. I'm trying to put IRS language in front of him and trying to get him to understand the risk. Not having a lot of success - January 31 is two days away and he's still insisting we send a 1099.

[Guest Maggie6561]

I am being told by the TPA that my former employer has every right to withhold the negative balance from my final pay and they did so when I left them over the summer. The response from the TPA is that the policy (to withhold any negative balance from the final pay) just has to be stated in the HR policy and can not be discriminatory. It is not part of the actual plan document. She also indicated that TPA's vary on their position with respect to this issue. Can't help but think, why wouldn't all employers have this as part of their HR policy? This could effectively eliminate all risks of offering such a plan unless someone's final paycheck was less than the negative balance.

This is correct, IF the plan document states this policy. The employer may mitigate the risk by requiring all participants to pay the annual election amount - even if such a participant terminates. This provision must be applied uniformly, however. In other words, a company may not collect from the last paycheck of only those participants who have a “negative” balance. In such a plan design, they would collect the remaining annual contribution from any terminating employee - regardless of claims to date.

[Guest murrr77]

Hello, I'm new to this board but have a question. I terminated from my employer this year (2007) and had used all of my 2007 Flexible Spending Election. I just received a letter from my former employer saying I have been over-reimbersed and have two options to re-pay: check or continue flexspend through cobra.

I contacted my state department of insurance (nebraska) and they referred me to the Employee Benefits Security Administration of the US Department of Labor. I called them today and they said it is the employer's right to get the money back.

So, I'm confused at this point, most of what I have read online says I am not responsible because it doesn't say anything about this in the plan handout. Should I contact the IRS for more info? Or will I need to get a lawyer? It is a lot of money, $2400 (I had planned laser eye surgery when elections were taking place). I am afraid if I just ignore the letter it could end up in collections and don't want that to happen.

Suggestions?

Thanks in advance...

[papogi]

Section 125 says that flex plans are for employees, but proposed regs say that “employees” can include former employees. It is partially due to this ambiguity that some employers collect FSA monies from terminated employees. It can be argued that an employer has no right to collect these monies, since it reduces the employer’s risk in the deal, and could disqualify the plan in the eyes of some courts. I am of this opinion. Either way, this is ultimately a matter of plan design, and should be spelled out in the plan. Note that if an employer decides to collect money from mid-year terminated employees, they must collect FSA money from all of those terminated people. They aren’t allowed to collect it only from those people who have “overspent” their FSA’s, and forget about those people who have underspent. Under no circumstances can the provision (which needs to be in the plan document for the employer to enforce) be applied in a manner which is dependent upon individual claims histories of terminated employees (i.e., discriminatory). The fact that your letter says that you have overspent your account (and pointed that out to you) indicates that they might not have sent the letter to you if you had underspent. That is a real problem, and suggests discrimination.

[Guest TXCafe]

Are they saying you were over-reimbursed because of incorrect reimbursement or something to that affect? Or are they saying they paid you your full annual election and now want it back because you terminated employment? I can't believe EBSA would condone the employer demanding repayment if it was simply Uniform Coverage in action. I don't really have a suggestion but think it would clarify the situation quite a bit to know why the employer says that. Also, I would get it in writing from the EBSA or wherever IF you can.

[Guest murrr77]

Are they saying you were over-reimbursed because of incorrect reimbursement or something to that affect? Or are they saying they paid you your full annual election and now want it back because you terminated employment? I can't believe EBSA would condone the employer demanding repayment if it was simply Uniform Coverage in action. I don't really have a suggestion but think it would clarify the situation quite a bit to know why the employer says that. Also, I would get it in writing from the EBSA or wherever IF you can.

I'm saying I had an allowed medical claim (laser eye surgery) after the first of the year and then terminated. The plan administrator, PayFlex, reimbursed me for the claim up to my annual election. I recently received a letter from my former employer (not PayFlex) requesting payment for the difference in what I had contributed and what I was reimbursed before termination. The letter says I can either repay by check/money order or by joining COBRA. And I actually jsut recieved the COBRA papers and it only has down that I can take dental, not flexible spending (I didn't take medical this year).

I did call the IRS and they said it was a legal matter and woudl not involve them, which I was surprised since it involves thier rules (correct?)

[leevena]

The employer cannot require you to repay the money. Now, you may run into problems, and depending on the amount you may end up paying it back. For example, what if they inititate legal action and you determine it's cheaper to pay then to defend. But the bottom line is the employer cannot require re-payment.

[oriecat]

The COBRA notice is correct. Flex COBRA is only available if you have a balance to use up. Since you were already reimbursed for your full annual election, there is nothing for you to gain by electing COBRA, therefore it isn't required to be offered.

I have often seen things that suggest that employers can always ask for the overspent funds to be returned, but they don't have any actual recourse to get it. It's possible they are just bluffing and seeing if you will send it. Many employees probably don't know that they aren't required to pay it back.

[Guest murrr77]

Do you suggest just ignorning the letter or sending some sort of response back quoting Sect. 125 of IRS code?

I also tried to move my 403b yesterday, only to find out from the financial company administering it that once they release my term paperwork I have to fill out and send back to my ex-employer, who then will send back to the financial company holding the 403b and I will be issued a check. Not sure if the check goes through my former employer or not too. It just seems like they are making it hard to leave - and I am wondering if they will drag thier feet or anything on the 403b since I haven't paid on the Flex. Also hoping the check is in my hands promptly so I don't risk being taxed by govt. if not deposited into an IRA within 60 days of issue.

[leevena]

I can only comment on the FSA part of the question. Whether you ignore it or not, is up to you. My suggestion would be to send them a polite letter informing them that you are under no legal requirement to reimburse them. I would also include a comment that the IRS does put the employer at risk for such incidents.

Good luck.

[J Simmons]

As a previous post in this thread explained, a flex plan can be drafted to provide that the remaining annual cost of an elected flex will be collected from the employee who departs mid-year. If so, it must be applied to all who leave mid-year, regardless of the claims experience against that flex account from the first of the year. For example, if two employees both elect $1,200 flex accounts for the year, both leave after 3 months (and $300 has been deducted from the paychecks of each), but one has used $1,000 of the flex in claims and the other has used $100 of her flex in claims, the plan must pursue them both for the $900 remaining of the annual cost, and must do so with equal vigor. At least this is what Harry Beker informally opined several years back.

A plan cannot go after the one employee for $700 ($1,000 of claims paid less $300 paid to point of termination), which is the scenario your murrr77 explains: employer "requesting payment for the difference in what I had contributed and what I was reimbursed before termination".

I would suggest you ask for the plan documents, the plan summaries, and specific reference to the provisions that the employer claims to be relying on in asking you for payment.

As for the 403b, if the employer were to monkey with that because of issues about the flex, the employer would likely be opening itself up to significant enforcement and civil penalties.

[leevena]

J Simmons. I do not pretend to be an expert about these plans, but if you look at IRS Regulation section 1.125-2, Q&A Answer 7(b)2, it states that the employer cannot ask for the money back. It even goes so far as to say the employer cannot even accept the money. The health fsa must be available at all times during the participants coverage period. This is off-set by the year end use it or lose it rule.

[J Simmons]

leevena, the example I showed does not have the employer asking for the extra reimbursement 'back'. That would be asking for $700 from just the one employee in my example, the one that had been reimbursed $1,000 but only paid $300 through payroll reductions by the time of employment termination mid-year. That, I agree, would be improper assessment based on the claims experience, belying the necessary risk-shifting element.

Rather, if the plan provides the employer may require every employee who quits mid-year to finish paying the annual cost of health flex plan elected by that employee. That's why each of the employees in my example would have to be pursued for the remaining $900 after having paid just $300 of the $1,200 cost of the annual flex elected. A plan doesn't have to include such a provision, but if it does, it must collect the remainder of the elected annual 'cost' from every employee who quits mid-year, whether the employee is 'ahead of the game' or behind it at the time of employment termination.

[QDROphile]

JSimmons:

I did not see any prior explanation that supports propriety of collecting amounts for the portion of the year after termination of employement and coverage. I saw an unsupported assertion to that effect and I saw more arguments against, with citation to authority against. Perhaps you could explain and clarify what you claim is possible and compliant.

[LRDG]

The uniform medical FSA coverage rule does not prohibit a plan from operating in a manner that requires all terminated employee participants to continue FSA contributions post-employment, irrespecitve of claims incurred. I agree with the previous poster regarding Harry Beker's comments on this issue.

[QDROphile]

OK, now I would like to see some reference to Harry Beker's comments in a prior post in this thread. If you are going to take an unconventional position, please do a better job of presenting it. Or perhaps I have such a blind spot I cannot even see words on the page.

[leevena]

JSimmons. I have searched and reviewed a few of Harry Beker's documents on line and cannot find anything that confirms your comments. I did find a document developed by the Employee Benefit Research Institute (ERBI) dated October 2003, that clearly states the employer cannot go after the over spent funds.

The link is http://www.ebri.org/pdf/publications/facts/1003fact.pdf please see the 5th bullet point. It states that, "However, because of the uniform reimbursement requirement, if an employee uses the entire amount in the FSA before the end of the calendar year and leaves employment with that employer, he or she does not have to reimburse the employer the difference between what was contributed, up to that point, and the amount used."

Again, I am not an expert in this benefit plan, but did I read something incorrectly? Or was there a change made after October of 2003?

[Guest mjb]

JS: Do you have a citation to your claim that the employer can require that the employee continue making FSA contributions since such a provision would allow the employer to avoid all risk of loss in violation of the regs for FSA under 1.125-2 Q-7. IRS officials have no authority to speak on behalf of the IRS.

[LRDG]

Requiring all terminated employees to participate post employment does not violate uniform coverage rules because it is not tied to prior claims. Employees with no prior claims continue contributions on post-employment basis, as do participants terminating with claims that exceed contributions. Terminated employees continue to file claims and receive reimbursement not to exceed annual elected amounts.

[papogi]

I have seen plan designs where mid-year terminated employees have been required through provisions in the plan document to contribute the rest of the year’s FSA election, and the Thompson manuals that I have clearly show it as a viable plan design option, with care. Let it be it known that I am firmly of the school of thought that this eliminates risk to the employer, and does not abide by the intent of the IRS regulations. With that said, the fact that this thread has continued on shows the reason for the two camps on this issue. The confusion lies on two points already raised. First, 125 regs allow flex plans to apply to former employees. Second, it can be argued that forcing all terminated employees to contribute the full annual election does not run afoul of the rule preventing repayment based on claims experience. Again, I absolutely believe that employers should not force terminated employees to contribute their annual FSA elections, and I believe that this goes along with IRS intent in the regs. Even if you are of the other school of thought, however, and are twisting the IRS regs (I think) to allow employers to recoup, we at least know that this must be in the plan doc and must applied without discrimination. For the original poster, it seems that the provision is not in the plan doc, and it appears to be discriminatory, as well.

[Guest murrr77]

Ok, here is the letter I plan on mailing them tomorrow:

>>

Re: Medical Care Spending Account

Dear ,

I recently received a letter from you stating that before termination of employment this calendar year I had been “over-reimbursed” for my 2007 Medical Care Spending Account. You also requested I reimburse The Company with a personal check payable to The Company for the difference between what I was reimbursed for my qualified medical expenses and what had been contributed via payroll elections prior to my termination.

I wish to make you aware, per Section 125 of the Internal Revenue Code, per the uniform reimbursement requirement, if an employee uses the entire amount of the FSA before the end of the calendar year and leaves employment with that employer, he or she does not have to reimburse the employer for that difference between the amount that was contributed, up to that point, and the amount used.

Thank you,

>>

Any comments?

Thanks

[Guest mjb]

Collecting the FSA contributions from former employees face two obstacles under state law (assuming that FSAs are not subject to ERISA because they do not provide a benefit). First proof of debt. The employer would have to produce a document that the emplyee signed agreeing to pay the contribution after termination of employment which would require more than just a salary reduction agreement to reduce pay. Second state labor laws would prohibit employers from recovering the remaining contributions on the grounds of overpayment of wages because state labor laws prevent employers from recovering employee compensation after it has been paid.

[Jacmo]

Last summer I left an employer with a negative balance in my FSA (I overspent deductions to date). I got a notice from the TPA that I owed the money. I ignored it. I got notices that insinuated I could legally get that overspent money by taking COBRA (basically, paying it back in.) I ignored it. I got other notices--ignored them too. 4 months ago, they finally gave up, although I did get a final accounting in January. I've heard nothing since.

[Chaz]

Even if requiring full year's coverage under the FSA even for terminated employees meets the requirements of 125 (which I doubt), wouldn't the headache of collecting premiums from departed employees make it just not worth it for employers?

[LRDG]

I personally don't like and am not an advocate of the type of plan design requiring post employment participation in medical FSAs. The type of plan is not participant user friendly, and ads administrative burden that I am not interested in.

I am of the opinion that forfeitures and plan sponsor payroll tax savings typically offset claim payments that exceed payroll deductions. I have successfully support the opinion with end of year forfeiture reports dating back to the inception of 125 plans and the uniform coverage rule.

Despite the fact that I wouldn't consider implementing such a plan option, I wouldn't consider excluding it from a presentation to a plan sponsor.