I know you are not my lawyer. I know that should I need legal advice I should contact a lawyer licensed to practice in my area. I know that advice given on a message board is worth less than what I pay for it.
An FSA is a way for employees to use pre-tax funds to pay for qualified medical expenses. You enroll in the plan at the beginning of the year for a set amount (say $3000). Each paycheck the employer deposits an equal portion of pre-tax earnings into that account. (in that case 3000/26 pay periods = $115.38 per pay check).
You can utilize any portion of that $3000 at any time throughout the year, even if you haven’t contributed that amount yet. However, this is a “use it or lose it” plan in that if you have funds remaining in your FSA at the end of the year you forfeit them. (Some plans allow you to use it after the end of the calendar year… but that’s not really important in this question).
My former employer offers a FSA plan for it’s employees. I have a friend who was employed there through March of this year. At the beginning of the year he had enrolled in the FSA for $4000. In January he had LASIK surgery done and was reimbursed by the plan for the full $4000 he had enrolled for.
In March, he left the employer for another one. At first, the company tried to make him re-pay the amount he was negative in his FSA. My wife works in HR and contends that it is against the plan rules as established for them to require repayment, even though when you enroll with that company you sign a statement saying you agree to repay any negative balance upon termination. So he told them that. They eventually kind of gave up, as he still worked closely with the company and it wasn’t worth the battle for them.
My question (Finally!) is -
Can the company require payment to a FSA account with a negative balance upon termination of employment. It’s a very difficult question for me to google, as it gets into both IRS tax issues and I think ERISA and Uniform Coverage Rules (whatever that is?). I’m hoping there is an HR expert here who can point me towards the reg or rules that will clarify this for me.
The only links I’ve been able to find that really address it seem to be from third party benefit providers, and they say that it’s a risk the employer takes… like this one.
I have been an HR person involved in administering one of these plans, and we definitely took this as a loss, like your wife says.
The closest I can find to the IRS saying this has to be the case is "You must be able to receive the maximum amount of reimbursement (the amount you have elected to contribute for the year) at any time during the coverage period, regardless of the amount you have actually contributed. "
I work for a benefits outsourcing mega-corp. We represent many large companies and I develop and consult on the IT behind FSA plans and consult on how they should work. I don’t know the legality in the abstract sense but I have never seen a company require repayment after using funds and then quitting. It was explained to me that confiscating unused funds from other employees at the end of the year balances this out. It is quite an easy scam for someone to run if they know this.
I want to try to comment on it but I seem to be having problems coming up with a non-inflamitory way of putting it. Please do not think I mean to offend.
The right thing for your friend to do would be to try to find some way to still participate in this through the company he now works for and finish paying off the obligation he took on.
Shagnasty makes a valid point - FSA takes all the unused funds from other employees. This to me is theft by itself, but is apparently legal. I figure what is good for the goose…
At least as of about 4 years ago, when I researched this extensively for my company, there is nothing sneaky or cheating or thieving about an employee’s using the entire balance he agreed to contribute, even if he hasn’t contributed it all yet.
I’m amazed at you guys who say he should pay it off. The IRS doesn’t think he should pay it off. The IRS also says if he contributes the entire amount - say that $4,000 - and uses zero, the company gets ALL of it. No reimbursement to the employee. Does that make the company a thief too? (I think it’s a sucky thing to do, but it’s completely legal.)
If that company had people sign something saying they would pay back overages, they had employees sign something illegal.
I wasn’t aware that you didn’t have to pay back if you left early. It is very clear that if you do not use your allotment for the year, you don’t get it back. That includes leaving before you spent your already deposited allotment. So, if those are the rules, I don’t see why you should consider this theft, any more than if your health insurance pays more or less than what you put in.
I suppose someone could game the system once. However to do it multiple times would require changing jobs on a yearly basis and getting a medical procedure without insurance reimbursement done each year. I don’t see this as happening too often.
Obviously the OP’s friend’s company has different policies, perhaps contrary to the law, but I was in a similar situation a few years back. My employer’s FY started in July and I was putting away, say, 1200/year (100/month). Our health insurer automatically submitted claims for our copays, to our flex spending accounts. For example if I had a claim for 200 dollars, with a 40 dollar copay, they automatically submitted the 40 dollars to the flex account and I’d get a check.
Well, my division was sold to another employer as of October 1. So I’d put aside 300 dollars when we were sold. I had a claim that August or September where my copay was, say, 900 dollars. I got a check for 900 dollars from the former employer’s plan, because that 900 was less than the annualized amount I had elected.
I called a bunch of different people. A said to call B. B said to call C. C said to call A. You get the picture. Nobody would take my money back.
So I said screw it, and applied the extra to some bills.
I might agree with you in spirit if the employee was the one who left.
However, if the company terminated him…why should he pay it back ethically? The company terminating him knew he was negative but terminated him anyway. If they didn’t want to be on the hook for it…they shouldn’t have terminated him.
In addition, if they gave him a severance package, they could just reduce it by the amount he is negative. However, if they terminated him without any severance, screw them…I see the OP’s friend not owing them a thing.
I undestand what some of you are saying regarding theft (or, I suppose I understand how you might see it that way since you seem to be uninformed). Thanks for the GQ answers…:rolleyes:
See what you’re really telling me when you say that, is that my WIFE is a theif because she encouraged him to look at the rules surrounding these plans and the fact that the company should not be asking him to pay it back.
Anyway, back to the question at hand…
Part of the reason for an employer to participate in this plan, is that the funds are pre-tax, meaning the employer will not pay FICA on it, nor will the employee pay taxes on it. BOTH benefit from that.
A recent IRS Publication reiterates the use it or lose it rule that was referred to above. Specifically (bolding mine)
Further, the publication speaks to availability of funds
A Q&A on a website for a third party Cafeteria Plan Flexible Spending account administrator here… (yes I realize this isn’t a cite… I’m still trying to dig into the IRS stuff and figure out the Uniform Coverage rule and section 105 and 106 which these plans must comply with, but I think this helps)
Okay… Now I’ve been searching, reading, and writing for about an hour. It looks to ME like there isn’t any clear cut decision on this.
I’ve seen blogs, benefit message boards, and articles online. Some say it’s a gray area, some say it’s definitely wrong for the company to request these funds, and some say the employer SHOULD request these funds. All everyone can agree on is that the IRS should have some clear guidance on this and doesn’t.
He quit, wasn’t laid off or fired. I say termination because that’s the termonolgy commonly used in HR as far as I know.