If a participant in a health FSA terminates employment during a plan y

[Guest SCUDDESLER]

If a participant in a health FSA terminates employment during a plan year and, at the time of the participant's termination, has received more from the health FSA than he/she contributed, may the employer recover the "overspent" amount by withholding the amount from the individual's final paycheck.

For example, C participates in a health FSA. C elects to defer $3,000 over the course of the plan year (to be contributed through equal payroll deferrals). In February, C submits a claim for $3,000 to the health FSA for recoverable medical expenses. In April, C terminates his employment. At the time C terminated his employment, he had only made contributions to the health FSA in the amount of $1,000. Unless his employer can withhold $2,000 from C's final paycheck (or require him to repay the plan in some other fashion), the employer has lost $2,000. What are the employer's options, if any, to recoup the $2,000?

[Linda]

The employer is out of luck. The difference cannot be recouped.

[Joe Priselac]

Linda is correct regarding the way most Cafeteria Plans are written. There is a way to write the Cafeteria plan document requiring employees to participate for the entire plan year. If termination of employment occurs, the employer can deduct the remaining unpaid contributions from the employee's last paycheck. This must be done for ALL employees regardless of their account balances. Also, many states have labor regulations about garnishing employee paychecks. A separate authorization may be necessary to satisfy state requirements. The employee continues as a fully active participant even after termination of employment for the balance of the plan year. Many employers shun this method because of the administrative hassles inherent in chasing ex employees for unpaid balances that exceed the value of the last paycheck.