Missed FSA Contribution - how to handle

[MD-Benefits Guy]

During a review of payroll deductions and benefits records, I discovered that one of our employees had a missed HCFSA deduction earlier this the year (system/timing issue from when the employee started his employment).  If no corrective action is taken, the employee will be about $120 short of his elected annual goal.

When I reached out to the employee to make him aware of the situation, he stated he does not want additional money to be taken out of an upcoming paycheck as a correction - he wants to leave things alone.

What are my options?  Are we required to take the additional $120 before the end of year to ensure that money deferred equals his annual election?  If the employee objects, what regulation/statute/article am I pointing him to so that he understands that this is required?

Related but separate, If someone misses FSA contributions because they are on unpaid medical leave (not FMLA, but state mandated leave) and underfunds an FSA for the annually elected amount, how should that be addressed?

TIA

[Brian Gilmore]

There are different options you could take for how to handle.  There's no right answer here--just what you find to be the most appropriate for your situation.  The employee already authorized the deductions via the Sections 125 cafeteria plan election, so that's not an issue.

The options are:

1. Spread Repayment Over Multiple Pay Periods: Take the missed contribution amount in intervals over the remainder of the year.
2. Lump Sum Repayment: Take the missed contribution amount in a lump sum.
3. Convert Missed Amounts to Employer Contributions: Forgive the employee contributions and not require the employees to repay.

I posted a full walkthrough on all these options (including template employee communications) here--

• https://www.newfront.com/blog/correcting-missed-cafeteria-plan-contributions

Slide summary:
Newfront Office Hours Webinar: Section 125 Cafeteria Plans

[Brian Gilmore]

For non-FMLA leave situations where health FSA coverage continues, you would generally use the standard pre-pay, pay-as-you-go, or catch-up contribution options set forth in the cafeteria plan FMLA rules.  I understand you're talking about a non-FMLA leave, but that's really all we have to go with.

More details:

https://www.newfront.com/blog/health-fsa-for-employees-on-leave

How to Collect Health FSA Contributions for the Leave Period

The Section 125 rules provide three ways for employers to collect the employee’s health FSA (or any other group health plan) contributions during the leave:

1. Pre-Pay: Under the pre-pay option, the employee is given the opportunity to pay for the continued coverage in advance (i.e., before commencing the leave). Employees can elect to reduce their final pre-leave paycheck(s) with pre-tax salary reduction contributions for all or a part of the expected leave period.

Pre-Pay Limitations:

• The pre-pay option cannot be the sole option offered. Employers offering this approach must offer at least one of the other two options to employees.
• Pre-pay cannot be used to pay for coverage in a subsequent plan year on a pre-tax basis. If the leave is expected to spill over into a subsequent plan year, the employee can only make pre-tax contributions for the part of the leave that occurs during the initial plan year.

2. Pay-As-You-Go: Under this approach, employees pay their contribution in installments during the leave. If it is a paid leave, the employee can continue to use the Section 125 cafeteria plan to contribute on a pre-tax basis from the stream of compensation through payroll. Otherwise, these contributions would have to be made by the employee on an after-tax basis (e.g., by check).

3. Catch-Up: With the catch-up approach, employees agree in advance to pay their contributions upon returning from leave. These catch-up contributions will reduce their initial return paycheck(s) by the contribution amount missed during the leave period. Although not entirely clear, it appears that employees may make catch-up contributions on a pre-tax basis even if the leave straddles two plan years.

In general, employees on a paid leave will prefer the pay-as-you-go option because it facilitates pre-tax contributions in a consistent manner without any disruption. Employees on unpaid leave will generally prefer the pre-pay or catch-up options to avoid having to make contributions on an after-tax basis outside of payroll.

Although the cafeteria plan regulations explicitly address these three payment options only in the context of FMLA leaves, employers are generally comfortable following the same approach for any other form of leave (e.g., state protected leave) where the employee will continue health FSA or other group health plan coverage.

Slide summary:

2025 Newfront Health Benefits While on Leave Guide