Health Flexible Spending Account

[jala]

I have a client that offers Health Flexible Spending Accounts to their employees.

One employee elected to contribute $2,900 for 2010.

She was involved in an accident and was out of work from May through October.

She did not terminate employment nor did she have any sick or vacation time left.

As a result, she did not receive a paycheck for the months that she was out of work.

This meant that from January 1, 2010 to May 2010, she contributed a total of $1,115.

Due to the accident, she requested and received a total of $2,860.

She is now able to return to work in November, leaving about 8 weeks left in the year to continue contributing to her HFSA.

Does the employer have the right to increase her HFSA contributions each payroll so she may complete the funding of her $2,900 commitment.

Since she has only funded $1,115 so far this would mean that she owes $1,785 into her account to be paid within an 8 week period.

What are the rules and/or alternatives in the above situation?

Can the employer make her pay the amount due? Can they increase the HFSA deductions from her pay to collect the amount due by the end of the year?

Any guidance in this matter is very much appreciated.

[mdm09]

I am not sure of the answer here.

Generally, if the employee stops paying the FSA "premium" then the FSA benefit would no longer be available, a rule that perhaps may have saved the employer from paying out those claims. Proposed regulation 1.125-5(d)(1) (finals are due soon, I hear) states that coverage must be uniform throughout the coverage period -- the maximum amount must be available at all times, the payment schedule must not be based on the rate or amount of claims, and the salary reduction payments must not be accelerated based on incurred claims and reimbursements. Thus, an employer might not be able to increase payments, but perhaps increasing payments does not mean the same thing as accelerating payments.

On the other hand, when an employer has mistakenly withheld too little salary, the plan administrator can seek collection of the underwithheld amount from the participant. As a last resort, the employer could include the underwithheld amount as taxable income. If this issue is styled as an underwithholding, as long as the plan sponsor were consistent in this approach then it would seem the plan sponsor could seek the amount due in these final weeks of the year (thus increasing the contribution amount from what the employee elected).

Important to review the terms of the plan, of course, to see if there is anything on point in it.

Does anyone else have a better answer?

[oriecat]

Was this person on FMLA? The 1.125-3 regs would apply.

http://www.indstate.edu/humres/docs/Section125-3.pdf

[mdm09]

Was this person on FMLA? The 1.125-3 regs would apply.

http://www.indstate.edu/humres/docs/Section125-3.pdf

This is a better answer than the one I provided (assuming the employee was on FMLA). Check out Q-3 in particular. Thanks for the better answer, oriecat!

[jala]

Was this person on FMLA? The 1.125-3 regs would apply.

http://www.indstate.edu/humres/docs/Section125-3.pdf

This is a better answer than the one I provided (assuming the employee was on FMLA). Check out Q-3 in particular. Thanks for the better answer, oriecat!

FMLA does not apply here.

[Ron Snyder]

The employer has no unilaterally modify an employee's election. The section 125 Regs address similar issues (such as the employee electing one amount, spending it in January and terminating employment before the amount has been withheld). The employer has no "right" to recover and, in fact, this is one of the risks the employer took when it undertook to sponsor a flex plan.

[LRDG]

The HFSA election is irrevocable. In order to comply with the irrevocable election requirement the unfunded amount of EEs anual election should be deducted over the remaining payroll periods for the plan year. This is true regardless if the leave is protected FMLA leave or unprotected leave.

If the leave is paid, there may be additional MFSA funding considerations.

[QDROphile]

Depends on the terms of the salary reduction agreement. Was the agreement to reduce salary for the year or a certain amount per pay period? If the agreement was to reduce a certain amount per pay period, the employer has no right to reduce the employee's pay by a greater amount for the purpose. Also remember that contracts can include implicit terms, including terms that can be inferred from regular adminstrative practices. The agreement had better be pretty clear that the "make-up" amounts can be taken from the few remaining pay periods in the year if that is what is contemplated. The employer should give a lot to thought about whether the amount is worth the risk of violating one of the most fundamental rules under section 125.

[LRDG]

Sec. 125 regulations specifically prohibits elections for a shorter period than 12 months regardless of the funding mechanism be it monthly deductions, annual, bi-annual, 12, 24 or 26, 52, 1 or 2 deductions per year or if the deduction frequency changes during the year. Exception for 1st plan year which can be less than 12 months, renewing annually there after.

Salary reduction agreement wouldn't supersede the terms in the plan document, nor should a salary reduction agreement be drawn up in a manner that would be open to conflict with the doc or the administrative requirements.

Salary reduction agreements should disclose to participant that the Sec. 125 election is irrevocable, elections can only be changed in event of qualified status change, funds are forfeited if unused, the plan year begin and end dates, and the plan is subject to Sec. 125.

Edited to add: Sec. 125 prohibits the plan from 'collecting' claim amounts that exceed deductions. For instance assume this participant did not return to work but instead terminated employment and particpation in the plan, the plan is prohibited from collecting amount claimed that exceeded the amount funded at last payroll deduction. Claims are paid based on the annual elected amount regardless of funding frequency. It is referred to as 'uniform coverage' and only applies to Medical FSA, not the Dependent Care FSA.

Because this participant returned to work with a balance due to fulfill her $2,900.00 irrevocable annual election, $1785 over remaining 8 pay frequencies according to your figures, or $142.80 per pay period is due.

[QDROphile]

Specifying the amount that may be reduced per pay periond is not the same as providing for coverage periods of less than 12 months. An employer can chooses provide $2900 of benefits for $1500 of salary reduction. While it might frustrate the funding intention for a salary reduction agreement to conflict with the intention for an annual amount to be reduced, that does not mean the plan and salary reduction agreement are necessarily well drafted. The tax and contract realities of section 125 arrangements are not well understood. Otherwise, why would people talk about pre-tax contributions to the account when there are no such things for tax purposes? Is it that everyone speaks only ERISA?

[LRDG]

Was the agreement to reduce salary for the year or a certain amount per pay period?

Payroll frequency is incidental to the annual elected amount both within the scope of this discussion and within the scope of the regs.

[Guest MikeRPG]

Just out of curiosity, would it have made a difference had the participant, while on leave, filed a Change in Employment Status form, allowing for an exception to the irrevocabilty issue?

[oriecat]

I believe a change in employment status would only allow a change if there was a loss of eligibility. Since this person continued to file claims, it sounds like they remained eligible.

[LRDG]

MikeRPG, if the plan doc includes election changes for unpaid leave and if the participant had requested an election change due to the LOA status change, it would have made a difference.

http://www.irs.gov/pub/irs-regs/td8921.pdf:

Sec. 1.125-4, page 15 & 16:

(iii) Employment status. Any of the following events that change the employment status of the employee, the employee’s spouse, or the employee’s dependent: a termination or commencement of employment; a strike or lockout; a

commencement of or return from an unpaid leave of absence; and a change in worksite.

In this case no election change was made, although claims were paid during the unpaid LOA. An alternative would be to suspend both FSA funding and claim payments during the unpaid period of time until there is a return to work, at which time funding and claim payments resume.

I would pay claims with service dates prior to the start of LOA. For example if the LOA was effective 05/15/2010, pre-LOA claims would be honored with service dates through 05/14/2010. Upon return to employment from unpaid LOA, for example 10/15/2010, both funding and claim payments resume, including claims w/service date during LOA. This is consistent with COBRA, which HFSAs are required to comply with. It could be argued that claims should not be interrupted during unpaid LOA, however COBRA regs do not require claims to be paid during the period premiums are unpaid, in this case the HFSA funding is the premium equivelant, according to HFSA COBRA regs.

[LRDG]

I'm curious about opinions/practices of other 125 admins interpertation of Mandated provisions involving election changes.

For example, my interpertation of mandates involving Employment Status in Sec. 1.125-4, the regs mandate that while the Plan document may prohibit election changes, the regs mandate ERs take certain actions when EEs take unpaid leave and ER/plan may not simply rely on a PD that prohibits election changes resulting from employment or family status changes.

I reached this conclusion because although a PD may prohibit election changes, in reality when EEs lose income, ER/plan must make decisions and take actions regarding continued Premium payments and coverage in medical and other insured plans, status of funding of FSAs, and status of the FSAs for post loss of income claim payments, in addition to ERISA mandated compliance.

Does anyone interpert that when a ER/plan prohibits election changes, Sec. 1.125-4 and ERISA mandates are complied with? If so how are funding and claims for Premiums and FSAs handled when there is loss of income?