Although an election to a cafeteria plan is generally irrevocable, there are times when a participant may change his election. There are the change in status rules (see my article from last month) and there is Internal Revenue Service (IRS) Regulation 1.125-3. This regulation summarizes the effect of the Family and Medical Leave Act (FMLA) on the operation of a cafeteria plan.
The leading principle outlined mandates that employers offer coverage under the same conditions as would have been provided if the employee were continually working during the entire leave period. This article examines the IRS Regulation 1.125-3 rules for participants going on an unpaid FMLA leave. It summarizes an employee’s right to continue or revoke coverage and cease payment for health flexible spending accounts (FSAs) when taking an unpaid FMLA leave and specifications for participants returning from leave.
Coverage Continuation
Employers may require an employee who chooses to continue coverage while on FMLA leave to be responsible for the share of premiums that would be allocable to the employee if the employee were working. FMLA requires the employer to continue to contribute their share of the cost of the employee’s coverage.
Cafeteria plans may offer one or more payment options to employees who continue coverage while on unpaid FMLA. These options are pre-pay, pay-as-you-go and catch-up.
• Pre-pay is paying for coverage in advance of the FMLA leave. This may be a difficult method of continuing coverage for a couple of reasons. The first consideration is if participants cannot afford to have extra funds taken from their paycheck and the second consideration is a timing issue. Most leaves involve an incident or circumstance that is not planned, making the pre-pay option impossible from the participant’s paycheck. However, if planning in advance is feasible, the coverage can be paid on a pre-tax basis through the cafeteria plan.
• The pay-as-you-go option means that participants pay their share of coverage payments on a schedule as if they were not on leave. This method would require the participant to write a check to the employer each month or pay period in order to continue coverage. Since no payroll is taking place, this payment is with after-tax dollars.
• Catch-up contributions allow employees to continue coverage but suspend coverage payments during their leave. Contributions are made up upon their return. The advantage is that contributions can be taken out on a pre-tax basis through a cafeteria plan. The downside for the employer is if the participant does not return from the leave and the employer may have reimbursed expenses in anticipation of the participant making up the coverage payments.
Whatever payment options are offered to employees on a non-FMLA leave must be offered to employees on an FMLA leave. The cafeteria plan may offer one or more of the payment options and may include the pre-pay option for employees on an FMLA leave even if this option is not offered to employees on a non-FMLA leave. However, the pre-pay option may not be the only option offered.
As long as the employee continues health FSA coverage or the employer continues it on their behalf, the full amount of the election for the health FSA, less any prior reimbursements, must be available to the participant at all times, including the FMLA leave period.
Coverage Revocation
Prior to taking an unpaid leave, participants may revoke existing health FSA coverage. Failure to make required payments during an FMLA leave may also result in lost coverage. Regardless of the reason for the loss of coverage, under the FMLA the plan must permit employees to be reinstated in the health FSA upon their return.
Depending on the plan document language, returning employees may decide not to elect coverage into the health FSA; or the plan may require returning employees to be reinstated in health coverage. If an employer requires reinstatement into the plan, employees returning from an unpaid leave not covered by the FMLA must also be required to resume participation upon return from leave.
The employer has the right to recover payments made on the participant’s behalf during the participant’s unpaid leave. The employer may take payroll deductions with the participant’s permission or may request payment from a participant that does not return to work.
If coverage under the health FSA terminates while the employee is on FMLA leave, the employee is not entitled to receive reimbursement for claims incurred during the leave. Even if the employee wishes to be reinstated upon return for the remainder of the plan year, the employee may not retroactively elect health FSA coverage for claims incurred during the leave when coverage was terminated.
Employees have the right to reinstate coverage at the level before their FMLA leave and make up the unpaid coverage payments; or they may resume coverage on a pro-rated basis at a level that is reduced for the period during the FMLA leave. This pro-rated level of coverage is further reduced by prior reimbursements and future coverage payments are due in the same monthly amounts payable before the leave.
Below are examples that clarify both a reinstated and a prorated coverage election that participants may make upon their return to work from an unpaid leave.
Facts
Contributed Prior to Disbursed FMLA from Number of Pay
Annual FMLA. Employee Paid Prior to May 1st to Periods for the
Election Twice Per Month FMLA July 31st Remaining Plan Year
$1,200 $400 (8 Pay Periods) $600 6 Pay Periods 10 Pay Periods
• Reinstate Coverage. Using the above facts, upon the participant’s return their annual election will remain at $1,200. Their coverage amount for the remainder of the year is as follows: original annual election minus reimbursed to date ($1,200 minus $600) equals $600. The new per pay period contribution will increase to $80 per pay period. Remember, they are making up contributions from the three-month leave.
For the entire plan year the employee will contribute $1,200 ($400 contributed prior to the leave plus $800 ($80 times 10)). The employer exposure is $1,200 ($600 disbursed prior to the leave plus $600 available upon their return). Now let’s see what happens if the employee chooses to prorate coverage.
• Prorate Coverage. The calculation is different in this instance. A new annual election is determined. This is done by prorating the original annual election for the months the participant was absent. Using the same facts as above, the annual election amount minus six pay periods that were missed ($1,200 minus $300) equals $900. The new, prorated annual election, reduced by prior reimbursements ($900 minus $600) equals $300. The per pay period contribution remains the same as before at $50 per pay period.
In this instance the employee will contribute $900 ($400 plus $500) with an employer exposure of $900 ($600 plus $300).
In either scenario, the employee is not covered for the time he is on the unpaid FMLA leave. He may not turn in claims that were incurred during leave, whether he chooses reinstatement or prorated coverage upon his return.
Certain restrictions apply when an employee’s FMLA leave spans two cafeteria plan years. A cafeteria plan may not operate in a manner that enables employees on FMLA leave to defer compensation from one plan year to a subsequent plan year. In other words, the employee may not pre-pay for coverage in one plan year that pays for coverage in the subsequent plan year.
And finally, employees on an FMLA leave have all the rights to change their elections according to the change in status rules under IRS Regulation 1.125-3 (see my article from last month). They may also enroll in benefits for a new plan year or any benefits that may be added by the employer during the year while they are on leave.
The information contained in this article is not intended to be legal, accounting, or other professional advice. We assume no liability whatsoever in connection with its use, nor are these comments directed to specific situations.
