Section 125 Reimbursement

System · May 2006

An employee has been reimbursed more $$ from the section 125 plan than has been deducted from their check to date. The employee is leaving for other employment. Can an ER ask the employee to deduct the difference from the last pay check or have it transferred to the employee's spouse (also employed with the same ER)?

I didn't think that was the way it worked. I remember hearing and reading that is doesn't but I can't recall the specific IRS or other provision reference. Does anyone happen to know where I can look to get some documentation of the related laws? I've tried to check the IRS code but haven't had much luck. Is it possible that the way in which an employer's plan is written that it allows for them to deduct the difference from the final check?

Any assistance would be greatly appreciate. Thanks (in advance) and have a great holiday weekend.

Kevin B.

Dutch2 · May 2006

Check your plan document or contact the provider for your plan. You are correct you cannot force the ee to repay the company for the funds that they received for their health costs that were over and above the amount they contributed. They can sign up for the maximum amount you allow each year, have a high medical cost in Jan or Feb. and therefore contribute very little to the plan,yet they can draw out the full amount allowed as soon as they need it.... then leave the company. That is the gamble for the employer. The employer may pay out more money than they collect each year. We usually average out over the years. Some years we pay our more and some years the ee's pay in more than they claim for deductions.

NaeNae55 · May 2006

Dutch2 is correct. That is the risk the company takes. Conversely, not using it all is the risk the employee takes.

Usually, even if you have employees leave like yours is doing you are still ahead. Just add up your FICA tax savings and compare it to the loss here and your administration fees. We got hit bad one year when we had a RIF early in the year (announced before they made their elections for the coming year). We were still ahead when we took the FICA tax savings into account....not by much, but still ahead.

Good luck!

Nae

System · May 2006

Thank you both for your time and comments. The information you shared was enough to give me that more of confidence I needed. Thanks again and have a great day!

Kevin B.

awilliams · May 2006

Kevin,

I am glad you received some helpful responses on the Forum already. I asked one of our benefits experts, attorney R. Scott Ruth of Miller & Martin PLLC, to give his response. According to Scott, you are correct that the employer may not ask for the $ to make up the difference. In order to be a qualified benefit under a cafeteria (125) plan, a Flexible Spending Account must involve risk-shifting, just like
insurance. This means that the total amount elected for the year must be available for claims at anytime during the year. Thus, if the
employee has left employment after the full amount has been reimbursed,the employee stops paying the "premium" at that time and the loss is on the "insurer", i.e. the employer.

Authority for this is not easy to find. It is in proposed regulations about the types of benefits that can be offered under a cafeteria plan. Specifically, the cite is IRS Prop Reg 1.125-2, Q/A-7.

I hope that helps! You can reach Scott at:sruth@millermartin.com.

Anne Williams
Group Publisher Benefits & Books
M. Lee Smith Publishers, LLC

Texas · August 2006

[font size="1" color="#FF0000"]LAST EDITED ON 08-16-06 AT 08:13AM (CST)[/font][br][br]I have read the information posted here and it is very helpful, but I have a related question. What if an employee is terminated, has filed no claims, has paid in $200, did not elect COBRA, but then filed a $700 claim for expenses incurred before the termination? Do we have to pay the claim, or can we just pay the $200 they have paid in?

I know of companies that would only pay the $200, but I'm not sure that is legal. Any advice would be appreciated!
Cathy

awilliams · August 2006

I believe you pay the $200 at that point, but I will double-check for you.

Anne Williams
Attorney Editor
M. Lee Smith Publishers, LLC

Texas · August 2006

Thank you for checking! I work for a non-profit and every penny counts!
Cathy

jmcaa · August 2006

[font size="1" color="#FF0000"]LAST EDITED ON 08-17-06 AT 09:00AM (CST)[/font][br][br]If your Flexible Benefit Plan is like ours then you HAVE to pay the WHOLE $700 no matter how much she put in.

As long as your employee made an election for the year, has had at least one deduction, quits or is terminated then files a claim that was INCURRED when she was an active employee she may receive the TOTAL of her YEARLY Election.

This is part of the "use-it-or-lose-it" rule where BOTH the employee and the employer have a risk with the plan.

ONLY when you have a DEPENDENT CARE account may you limit the reimbursement to how much money the employee has put in.

>[font size="1" color="#FF0000"]LAST EDITED ON
>08-16-06 AT 08:13 AM (CST)[/font]
>
>I have read the information posted here and it
>is very helpful, but I have a related question.
>What if an employee is terminated, has filed no
>claims, has paid in $200, did not elect COBRA,
>but then filed a $700 claim for expenses
>incurred before the termination? Do we have to
>pay the claim, or can we just pay the $200 they
>have paid in?
>
>I know of companies that would only pay the
>$200, but I'm not sure that is legal. Any
>advice would be appreciated!
>Cathy

E Wart · May 2006

You are up the creek. There is really nothing you can do. This is the risk for health care spending accounts. Hopefully, you will have some folks who participate who don't use the entire amount and this will help to off set it.
This is why we have never set one up at my current employer.
However, with Child Care Spending accounts, you can set up where you don't reimburse until they have the money in the account so you don't ever "overspend". (Or so I have been told.)
E Wart

FunHRBanker · May 2006

E Wart-
That's exactly how DCRAs work. The employee can only be reimbursed for up to the amount that has been contributed.

Section 125 Reimbursement

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