Health FSA Contributions and Leaves of Absence

Posted by BAS - 08 June, 2017

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The treatment of flexible spending account (FSA) participation/contributions while a person is on leave depends on the company’s leave policies and the type of leave.   Employers should review their leave policies to understand their approach to FSA participation during different types of leave and administer benefits consistently. For example, if the leave is protected under the Family and Medical Leave Act, USERRA or is an ADA accommodation leave, different rules may apply than if the leave is just a discretionary unpaid leave of absence.

FMLA Leave

If the leave is protected under the Family and Medical Leave Act, an employer must maintain coverage under a health FSA for the duration of the FMLA leave. Coverage under a dependent day care FSA does not have to be maintained during FMLA leave.  Under the FMLA, employers must make arrangements for their employees on FMLA leave to pay their shares of the health FSA premium.  The FSA regulations describe three permissible ways to handle benefits under a cafeteria plan during FMLA leave.  These three options are generally referred to as “pre-pay,” “pay-as-you-go,” and “catch-up.”

An employer can ask for payment of the FSA premiums before the leave start (pre-pay), the employer can ask the employee to pay FSA premiums with after-tax dollars during the leave (pay-as-you-go), or the employer can ask the employee to make up the missed contributions when the employee returns from the FMLA leave (catch-up). An employer may not only offer pre-payment; this option must be offered with at least one of the two other options.

USERRA

The Uniformed Services Employment and Reemployment Rights Act (USERRA) provides certain benefits rights for employees on a leave of absence for military service. Employees on USERRA leave must have the right to continue health FSA participation while on leave.  Employers typically give employees the same three payment options during a USERRA leave as under the FMLA.

ADA

Some federal anti-discrimination laws also impact the health coverage (including health FSA coverage) provided to employees.  Typically, if an employer is providing leave to an employee for an accommodation under the Americans with Disabilities Act, participation in the health FSA and repayment of contributions upon return from the leave is administered as it is for other leaves provided by the employer.

Cafeteria Plan Repayment Implications

Under the Code section 125 plan rules, an employee generally cannot use pre-tax dollars in one calendar year to make up for premiums attributable to another calendar year.  So, if an employee is returning from any leave in a new calendar year and is asked to “catch-up" the missed premiums, any repayment attributable to a prior year’s coverage would have to be made with after-tax dollars.  Repayments attributable to premiums from the year in which the repayment is being made may generally be paid with pre-tax dollars under the cafeteria plan.

Employers should review their leave policies to determine how flexible spending accounts should be administered during leaves of absence, make sure to communicate policies appropriately to individuals going on leave, and treat FSA participation consistently for employees on leave.


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