Health Care Flexible Spending Accounts 101

[Guest Donna Lee]

My expertise is in retirement plans and I only know the very basics about the FSA. I have two questions regarding my husband's flexible spending account:

1. If he commits to making $2,000 contribution for 2000 and terminates 6/30/2000 after contributing $1,000, is he still required to make the $1,000 additional contribution? If yes, how since no payroll deduction?

2. If the answer to #1 is no and at 6/30/2000 he has spent $1,500 of the account, how does he contribute the remaining $500?

Thanks for educating me.

[Guest CLKeown]

Donna -

This is where the employer takes a risk on a Health Care FSA.

In a HC FSA employers are required to pay out any amount up to the elected contribution amount when it is submitted for payment.

In the event of a termination of employment, if the employer has reimbursed more than was paid in by the employee, the employer has no recourse in recovering the difference.

In a Dependent Care FSA, however, the employer is not required to pay out more in reimbursements than has been contributed by the employee.

[Guest kclark]

To answer your question simply, No, he is not required to make the additional $1,000 contribution.

This is one of the problems employers face with Health FSAs when Ees terminate and have already had full reimbrusement on FSA but haven't made full payroll contributions.

Your husband does have the "option" of continuing his FSA through COBRA until the end of the plan year for the remaining $1,000.

Usually people only choose this option if they anticipate further unreimbursed medical expenses since no further claims may be submitted for dates of service past the termination date.

Hope that helps!

[Guest Donna Lee]

Thanks for the info. Let me just clarify one thing: if DOT is 6/30/2000, you cannot file any claims for services after this date even if you continue the FSA through COBRA?

[JWK]

No, if you elect COBRA, you CAN submit claims incurred after 6/30/2000. That's the reason for electing COBRA, so you can get "stranded" contributions out of the FSA that you would otherwise forfeit.

Note that in your example, there would be no advantage to electing COBRA because the participant has received $1500 in benefits and paid only $1000 in "premium." So the participant can quit while he/she is ahead, which is where the employer risk element comes in.

Also, note that the posts in this thread have referred to the rules that usually apply to health FSAs--you need to also take a look at the plan document to confirm that this is how the actual plan is operated. For example, some health FSAs purport to require the participant to contribute the entire remaining election amount for the year out of the last paycheck. Many people believe provisions of this type violate COBRA and state payroll withholding rules (if applicable), but there are arguments on both sides. I'd want to know if the plan had such a provision and whether and how it was enforced before electing to participate.

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[Guest kclark]

JWK: In your example of a plan requiring terminating employees to contribute remaining balance of annual election: wouldn't the plan need to take into consideration the amount actually reimbursed from account vs. annual amt. elected to determine the amt. to be withheld from final paycheck?

Just curious! I've never heard of a plan requiring this.

[Lisa Hand]

kclark-

That type of plan requirement is called a mandatory final check rule and requires ALL participants regardless of claims, account balance ect, to contribute the remaining allocation for the plan year out of their final check. The reason you probably have not heard of this type of setup is that there are serious concerns on whether it violates COBRA and state laws. Additionally, very few employees would sign up for a "benefit" with this type of punitive aspect to it. For the above mentioned reasons, my company as a TPA, will not set up or work with these type of plans.

[JWK]

Lisa is correct. We advise against the final paycheck arrangement, but some employers do use it.