This article examines the rules for participants going on an unpaid Family and Medical Leave Act (FMLA) leave. Internal Revenue Service (IRS) Regulation 1.125-3 summarizes employees’ rights to continue or revoke coverage and cease payment for healthcare flexible spending accounts (FSAs) when taking an unpaid FMLA leave and specifications for participants returning from leave. The leading principle outlined mandates employers offer coverage under the same conditions as would have been provided if the employee were continually working during the entire leave period.
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 employees’ coverage.
Flexible benefits 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 to deduct from participants’ paychecks. However, if planning in advance is feasible, the coverage can be paid on a pre-tax basis through the flexible benefits 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 flexible benefits plan. The downside for the employer is if the participant does not return from the leave, the employer may have reimbursed expenses in anticipation of the participant making up the coverage payments.
The flexible benefits 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 employees continue healthcare FSA coverage, or employers continue it on their behalf, the full amount of the election for the healthcare FSA, less any prior reimbursements, must be available to the participant at all times, including the FMLA leave period.
Prior to taking an unpaid leave, participants may revoke existing healthcare 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 FMLA, plans must permit employees to be reinstated in the healthcare FSA upon their return.
Depending on the plan document language, returning employees may decide not to elect coverage into the healthcare FSA; or plans may require returning employees to be reinstated in healthcare coverage. If the employer requires reinstatement into the plan, they must also require those returning from an unpaid leave not covered by the FMLA to also resume participation upon return from leave.
The employer also has the right to recover payments for benefits when the employee revokes coverage.
If coverage under the healthcare FSA terminates while employees are on FMLA leave, employees are not entitled to receive reimbursement for claims incurred during leave. Even if employees wish to be reinstated upon return for the remainder of the plan year, employees may not retroactively elect healthcare FSA coverage for claims incurred during leave when coverage was terminated.
Employees have the right to reinstate coverage at the level before their FMLA leave and make up unpaid coverage payments, or they may resume coverage on a prorated basis at a level that is reduced for the period during FMLA leave for which no premiums were paid. This prorated level of coverage is further reduced by prior reimbursements and future coverage payments are due in the same monthly amounts payable before the leave.
Reinstate Coverage. Using the above facts, and upon the participant’s return from FMLA, the annual election will remain at $1,200. The election, or 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 contributions will increase to $80 per pay period. Remember, they are making up contributions from the three-month leave. 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 leave plus $600 available upon their return. Now let’s see what happens if employees choose to prorate coverage upon their return from FMLA leave.
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 participants were absent. Using the same facts as previously, 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, employees are not covered for the time they are on FMLA if coverage is revoked. They may not turn in claims that were incurred during leave whether they choose reinstatement or prorated coverage upon their return.
Certain restrictions apply when an employee’s FMLA leave spans two flexible benefits plan years. A flexible benefits plan may not operate in a manner that enables employees on FMLA leave to defer compensation from one plan year to a subsequent flexible benefits plan year. In other words, employees may not pre-pay for coverage in one plan year that pays for coverage in the subsequent plan year.
If on paid FMLA leave, the employer may mandate that the employee’s share of premiums be paid by the method normally used while the employee was working.
And finally, employees on FMLA leave have all the rights to change their elections according to the change in status rules under IRS Regulation 1.125-4 when returning from an unpaid leave of absence. They may also enroll in benefits for new plan years or any benefits that may have been added by the employer while they were 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.