Although an election to a cafeteria plan is generally irrevocable, there are times when participants may change their election. For information about permissible changes, please refer to the change in status rules and 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 IRS Regulation 1.125-3 rules for participants going on unpaid FMLA leave. It summarizes employees’ rights 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.
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 its share of the cost of employees’ coverage.
Cafeteria plans may offer one or more payment options to employees who continue coverage while on unpaid FMLA. These options are prepay, pay-as-you-go and catch-up.
• Prepay 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 FMLA leave involves an incident or circumstance that is not planned, making the prepay option impossible to deduct from participants’ paychecks. However, if planning in advance is feasible, the coverage can be paid on a pretax 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 requires participants to write a check to their employer each month or pay period in order to continue coverage. Since no payroll is taking place, such a payment is with after-tax dollars.
• Catch-up contributions allow employees to continue coverage but suspend coverage payments during their leave. Catch-up contributions are made upon their return. The advantage is that contributions can be taken out on a pretax basis through a cafeteria plan. The downside is that if a participant does not return from the leave, 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. A cafeteria plan may offer one or more payment option and may include the prepay option for employees on an FMLA leave, even if this option is not offered to employees on a non-FMLA leave; however, the prepay option may not be the only option offered.
As long as employees continue health FSA coverage, or employers continue it on their behalf, the full amount of a health FSA election, less any prior reimbursements, must be available to participants at all times, including the FMLA leave period.
Prior to taking an unpaid leave participants may revoke existing health FSA coverage. Failure to make required payments during an FMLA leave may result in lost coverage. Regardless of the reason for the loss of coverage, employees must be reinstated to a health FSA upon their return from FMLA leave.
Depending on plan document language, returning employees may be allowed not to elect coverage for a health FSA or they may be required to be reinstated in health coverage. If an employer’s plan requires reinstatement, it must also require those returning from unpaid leave not covered by FMLA to also resume participation upon return from leave.
An employer also has the right to recover payments for benefits when an employee revokes coverage.
If coverage under a health FSA terminates while an employee is on FMLA leave, that employee is not entitled to receive reimbursement for claims incurred during leave. Even if an employee wishes to be reinstated upon return for the remainder of a plan year, that employee may not retroactively elect health FSA coverage for claims incurred during leave when the 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.
Annual Election $1,200
Contributed Prior $ 400
to FMLA (8 pay periods)
(Employee paid twice a month)
Distributed $ 600
Prior to FMLA
FMLA 6 pay periods
from May 1 to July 31
Number of Pay Periods 10
Remaining in Plan Year
Reinstate Coverage. Using the above facts, and upon a participant’s return from FMLA, annual election will remain at $1,200. The employee’s 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 pay period contributions will increase to $80 per pay period. Remember, the employee is 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 the employee’s return).
Now let’s see what happens if the employee chooses to prorate coverage upon return from FMLA leave.
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 on FMLA if coverage is revoked. No claims may be submitted that were incurred during leave, whether they choose reinstatement or prorated coverage upon their return.
Certain restrictions apply when 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 cafeteria plan year. In other words, employees may not prepay for coverage in one plan year that pays for coverage in the subsequent plan year.
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.
If on paid FMLA leave, an employer may mandate that an employee’s share of premiums be paid by the method normally used while the employee was working.
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.
Janet LeTourneau, ACFCI
ACFCI, is the compliance manager at WageWorks. She draws upon more than 20 years of experience with flexible benefits plans and tax laws to perform consulting services and monitor quality control. LeTourneau is a frequent speaker to employer groups and conferences and was formerly on the board of directors for the Employers Council on Flexible Compensation (ECFC) and is a current member of the ECFC Technical Advisory Committee (TAC). She is the lead instructor for the Section 125 administrators training workshop. LeTourneau was one of the first people in the country to earn the Advanced Certification in Flexible Compensation Instruction designation sponsored by the Employers Council on Flexible Compensation. She is a certified trainer in the ACFCI program. LeTourneau can be reached by telephone at 262-236-3021 or by email at firstname.lastname@example.org.