Question: What happens to employees’ health FSA coverage when they go on a leave of absence?

Short Answer: FMLA rules addressing the health FSA permit employees to a) continue coverage through pre-pay, pay-as-you-go, or catch-up contributions, or b) revoke coverage for the period of leave and return at a full or reduced election to address the missed contributions during leave.

FMLA Leave Health Coverage Continuation Rights: Overview

Employers must permit employees to maintain group health plan coverage for an employee on FMLA leave in the same manner as if the employee were active. Employees have the right to elect to continue coverage or revoke it for the leave period. Many states have similar protected leave laws that provide employees the same rights to continue group health plan coverage where FMLA does not apply.

For more details:

• Newfront Health Benefits While on Leave Guide

• Health Benefits During Protected Leave

Health FSA is a Group Health Plan Subject to FMLA Continuation Rights

The health FSA is a component of the employer’s Section 125 cafeteria plan. Although it differs in many respects from the traditional group health plan offerings (medical, dental, vision, etc.), it is still a group health plan subject to many of the same requirements—including leave continuation rights.

• For more details: Newfront Section 125 Cafeteria Plans Guide

When an employee goes on FMLA leave (or a state protected leave offering similar rights), the employee has the right to continue or revoke health FSA coverage during the period of the leave in the same manner as medical, dental, vision, and any other form of group health plan coverage.

Employees who choose to maintain health FSA coverage will still have access to the health FSA during the leave period. For purposes of the health FSA, “coverage” refers to the ability to incur reimbursable expenses. In other words, employees who continue health FSA coverage during a leave can submit to the health FSA for reimbursement any §213(d) qualifying medical expenses incurred during the leave period.

How to Collect Health FSA Contributions for the Leave Period

The Section 125 rules provide three ways for employers to collect the employee’s health FSA (or any other group health plan) contributions during the leave:

1. Pre-Pay: Under the pre-pay option, the employee is given the opportunity to pay for the continued coverage in advance (i.e., before commencing the leave). Employees can elect to reduce their final pre-leave paycheck(s) with pre-tax salary reduction contributions for all or a part of the expected leave period.
   
   Pre-Pay Limitations:
   -The pre-pay option cannot be the sole option offered. Employers offering this approach must offer at least one of the other two options to employees.
   
   -Pre-pay cannot be used to pay for coverage in a subsequent plan year on a pre-tax basis. If the leave is expected to spill over into a subsequent plan year, the employee can only make pre-tax contributions for the part of the leave that occurs during the initial plan year.

2. Pay-As-You-Go: Under this approach, employees pay their contribution in installments during the leave. If it is a paid leave, the employee can continue to use the Section 125 cafeteria plan to contribute on a pre-tax basis from the stream of compensation through payroll. Otherwise, these contributions would have to be made by the employee on an after-tax basis (e.g., by check).

3. Catch-Up: With the catch-up approach, employees agree in advance to pay their contributions upon returning from leave. These catch-up contributions will reduce their initial return paycheck(s) by the contribution amount missed during the leave period. Although not entirely clear, it appears that employees may make catch-up contributions on a pre-tax basis even if the leave straddles two plan years.

In general, employees on a paid leave will prefer the pay-as-you-go option because it facilitates pre-tax contributions in a consistent manner without any disruption. Employees on unpaid leave will generally prefer the pre-pay or catch-up options to avoid having to make contributions on an after-tax basis outside of payroll.

Although the cafeteria plan regulations explicitly address these three payment options only in the context of FMLA leaves, employers are generally comfortable following the same approach for any other form of leave (e.g., state protected leave) where the employee will continue health FSA or other group health plan coverage.

Administrative Process Where Employee Revokes Health FSA During Leave

Employees have the right to revoke health FSA coverage during an unpaid FMLA leave. (The one exception is where the employer allows the employee to discontinue contributions during the unpaid leave period. In that case, the employer can require health FSA coverage to continue—presumably with catch-up contributions required upon return—but very few employers take this position.) Where the employee revokes coverage, any expenses incurred during the leave period are not eligible for reimbursement by the health FSA.

Upon return from leave, the employee may elect (or the employer may require the employee) to be reinstated in the health FSA for the remainder of the plan year. The employee may not retroactively elect health FSA coverage for claims incurred during the leave period when coverage was terminated—only prospective reinstatement is permitted.

Upon reinstatement, which may occur either because the employee elects reinstatement or because the employer requires reinstatement, the employee has the right to select between two different options for how to address the remainder of the health FSA plan year:

Reinstatement Option 1: Return to Full Health FSA Elected Coverage Amount

Under this approach, the employee will a) resume coverage at the level in effect before the FMLA leave, and b) make up the unpaid amount by increasing health FSA contributions for the remainder of the plan year.

Employees taking this approach still will not have access to reimbursement for any claims incurred during the leave period, but they will have the ability to submit claims for reimbursement up to the full original election amount. To reiterate: Only expenses incurred during the portion of the plan year with coverage in effect (i.e., the periods prior to the leave and following reinstatement after returning from leave) will be eligible claims.

Example #1:

• Travis makes a $3,200 election for the calendar plan year health FSA at open enrollment with his company Arrowhead Inc.

• He contributes $133.33 per semi-monthly pay period to the health FSA prior to going to leave.

• Travis goes on unpaid paternity leave for the months of June, July, and August, and he elects to revoke his health FSA during that leave period.

• Upon return from leave in September, Travis elects to return to his full original $3,200 coverage amount for the health FSA.

Result #1:

• Any expenses incurred during June, July, or August are not reimbursable by the health FSA.

• Arrowhead Inc. will increase Travis’s health FSA contribution amount upon return to $233.33 for the remainder of the plan year to reach the full election amount.

• Travis can submit up to $3,200 in expenses incurred during the months of January-May and September-December for reimbursement from the health FSA (but not July-August).

Reinstatement Option 2: Reduce Health FSA Coverage Amount to Preserve Same Contributions

Under this approach, the employee will resume health FSA contributions upon return at the same level in effect before the FMLA leave. This results in a reduced amount of health FSA coverage available for the plan year because the employee does not make up the unpaid contributions from the leave period.

Although employees lose the ability to incur reimbursable claims up to their original health FSA election amount under this approach, some employees prefer this option to avoid the commensurate increased contributions that would reduce their take-home pay for the remainder of the plan year.

Example #2:

• Taylor makes a $3,200 election for the calendar plan year health FSA at open enrollment with her company Swift Service Inc.

• She contributes $133.33 per semi-monthly pay period to the health FSA prior to going to leave.

• Taylor goes on unpaid maternity leave for the months of June, July, and August, and she elects to revoke her health FSA during that leave period.

• Upon return from leave in September, Taylor elects to reduce her original health FSA coverage amount to preserve the same $133.33 per semi-monthly pay period contribution amount.

Result #2:

• Any expenses incurred during June, July, or August are not reimbursable by the health FSA.

• Swift Service Inc. will maintain Taylor’s health FSA contribution amount upon return at the same amount as prior to the leave ($133.33/pay period) for the remainder of the plan year.

• Taylor’s health FSA coverage limit is decreased from $3,200 to $2,400 because she has missed three months of contributions that she has elected not to make up.

Reminder: HRAs are Group Health Plans Subject to Leave Continuation Rights

HRAs are also group health plans subject to FMLA leave continuation rights. An employee on FMLA leave (or a state protected leave offering similar rights) has the right to continue access to HRA coverage during the period of leave in the same manner as medical, dental, vision, or any other form of group health plan coverage.

Because there are no employee contributions (by definition) to an HRA, the employee simply maintains the ability to incur reimbursable expenses under the plan without the need to address cost of coverage in the same manner as the health FSA. The leave essentially has no effect on the employee’s HRA eligibility, participation, or administration.

Reminder: HSAs are Not Group Health Plans Subject to Leave Continuation Rights

HSAs are personal trust/custodial accounts controlled solely by the employee as an individual. Accordingly, HSAs are not an employer-sponsored group health plan subject to ERISA, COBRA, HIPAA, etc., and therefore the FMLA and other protected leave law rights to continue group health plan coverage do not apply to HSAs.

• For more details: Employer HSA Contributions During Protected Leave

The result is that the employer has no obligation to continue making contributions to employees’ HSAs while an employee is on FMLA or other forms of protected leave, nor is there an obligation to provide make up contributions up return. Employers that would like to be more generous can establish leave policies to continue funding the HSA for employees who maintain HDHP coverage during the leave. The one caveat is that employers will need to continue to make HSA contributions for employees on protected leave if they continue to make employer HSA contributions on other forms of non-protected leave.

Summary

Employers and employees alike often overlook the leave administration issues associated with the health FSA. Although continuation of the major medical (and to a lesser extent, dental and vision) is rightly the focus of most leave concerns, employees also have the right to continue health FSA “coverage” during their leave. In the context of a health FSA, “coverage” refers to the ability to continue incurring reimbursable expenses. This can still be an important continuation right for employees who may incur significant out-of-pocket health expenses related to the cause of their leave.

Employers should ensure that they have the payroll and TPA procedures in place to ensure smooth administration of the continuing eligibility, participation, and contribution processes for employees who maintain health FSA coverage while on leave, as well as the procedures for addressing the options available to employees who revoke health FSA coverage when return from leave.

Relevant Cites:

Treas. Reg. §1.125-3, Q/A-6:

Q-6. Are there special rules concerning employees taking FMLA leave who participate in health FSAs offered under a cafeteria plan?

A-6. (a) In general. (1) A group health plan that is a flexible spending arrangement (FSA) offered under a cafeteria plan must conform to the generally applicable rules in this section concerning employees who take FMLA leave. Thus, to the extent required by FMLA (see 29 CFR 825.209(b)), an employer must—

(i) Permit an employee taking FMLA leave to continue coverage under a health FSA while on FMLA leave; and

(ii) If an employee is on unpaid FMLA leave, either—

(A) Allow the employee to revoke coverage; or

(B) Continue coverage, but allow the employee to discontinue payment of his or her share of the premium for the health FSA under the cafeteria plan during the unpaid FMLA leave period.

(2) Under FMLA, the plan must permit the employee to be reinstated in health coverage upon return from FMLA leave on the same terms as if the employee had been working throughout the leave period, without a break in coverage. See 29 CFR 825.214(a) and 825.215(d)(1) and paragraph (b)(2) of this Q&A-6. In addition, under FMLA, a plan may require an employee to be reinstated in health coverage upon return from a period of unpaid FMLA leave, provided that employees who return from a period of unpaid leave not covered by the FMLA are also required to resume participation upon return from leave.

(b) Coverage. (1) Regardless of the payment option selected under Q&A-3 of this section, for so long as the employee continues health FSA coverage (or for so long as the employer continues the health FSA coverage of an employee who fails to make the required contributions as described in Q&A-3(a)(2)(iii) of this section), the full amount of the elected health FSA coverage, less any prior reimbursements, must be available to the employee at all times, including the FMLA leave period.

(2) (i) If an employee's coverage under the health FSA terminates while the employee is on FMLA leave, the employee is not entitled to receive reimbursements for claims incurred during the period when the coverage is terminated. If an employee subsequently elects or the employer requires the employee to be reinstated in the health FSA upon return from FMLA leave for the remainder of the plan year, the employee may not retroactively elect health FSA coverage for claims incurred during the period when the coverage was terminated. Upon reinstatement into a health FSA upon return from FMLA leave (either because the employee elects reinstatement or because the employer requires reinstatement), the employee has the right under FMLA: to resume coverage at the level in effect before the FMLA leave and make up the unpaid premium payments, or to resume coverage at a level that is reduced and resume premium payments at the level in effect before the FMLA leave. If an employee chooses to resume health FSA coverage at a level that is reduced, the coverage is prorated for the period during the FMLA leave for which no premiums were paid. In both cases, the coverage level is reduced by prior reimbursements.

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship. Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).