employer deducts more than election

[Guest billy bong]

an employee elects $50 per pay period, there are 2 pay periods per month. thus, his total annual deduction is equal to $1200.

he makes a claim in august for the total amount of $1200. he resigns on october 15. he has 2 paychecks due (one is vacation pay unused) and the employer deducts $150 from each of the paychecks to make up for the difference between his claim and the amount deducted year to date. is there an IRS rule/reg which prevents employers from doing this? deducting more than the amount he elected, is that against DOL rules? please cite any references.

[Guest Ladybug]

I would like an answer to this question too. The information I have gathered seems to say if you collect from an employee with a negative "account", you must collect from all terminated employees to qualify your Plan. The problem I have with this information is "What is COBRA for the flexible spending accounts then?". Under these circumstances, all employees would be active participants until the end of the Plan year regardless as to whether they are active employees or not. Please help!!

[Lisa Hand]

1.125-1 Q/A-17 starting the second paragraph under A-17:

"First, in order fo medical care reimbursements paid to a particiapnt under a cafeteria plan to be treated as nontaxable under section 105(B), the reimbursements must be paid pursuant to an employer-funded "accident or health plan", as definded in section 105(e) and scetion 1.105-5. This means that, although the reimbursements need not be provided under a commercial insurance contract, the reimbursments must be provided under a benefit that exhibits the risk-shifting and risk-distribution characteristics of insurance. A benefit will not exhibit the required risk-shifting and risk-distribution characteristics, even though the benefit is provided under a commerical insurnace contract, if the ordinary actuarial risk of the insurer is negated either under the terms of the benefit or by any related benefit or arrangement (including arrangments formally outside of the cafeteria plan)."

Basically, this means you can not shift the "risk" of the medical reimbursement benefit back onto the employee, since the employer is the "insurer"even in an agreement outside of the cafeteria plan. While some plans may be written to collect all unpaid "premiums" from a final pay check with it being applied on a uniform and nondiscriminartory basis(all employees. There are serious questions, which even the IRS raises, as to whether doing so violates COBRA and state labor laws.

However,if the plan is only collecting negative amounts, it would seem to be clearly in violation of the section reference above. Given that the IRS could disallow the plan, fines can be assessed and all back taxes, plus penalties and interest would be due, it seem better to be extremely conservative in this area. The "risk" to the employer of losses to advance claims can be off-set by limitations on the amount that can be put into the medical reimbursemtn account, forfitures of unused allications as well as the employer FICA savings.