fsa and severance pay

I am swamped and too tired to go through the regs looking for this one:

If I am making severance payments do I continue to deduct FSA (medical reimbursement)? I'm thinking no, but I want to be sure.


  • 10 Comments sorted by Votes Date Added
  • Does the severance include company paid insurance benefits?

  • Re: FSA and Severance Agreements
    If I spend 100% of my pre-funded healthcare FSA on day #1 of the period, and get terminated on day #2, the employer incurs the loss of the pre-funding and cannot claim it against me, correct? Correct.

    I am to receive pay in a scheduled fashion (along side the org's normal payroll,) can they legally withhold funds to cover what would have been contributed during the time I was employed? Yes. You are still on the payroll, being paid wages, and are subject to the usual deductions as required/defined in tax regulations and your employer's benefit plan documents.

    Would the severance agreement have to be written to support that? No.

    Hi Nae,

    Don't know if the above helps, but I found it on a law website. Also, our FSA plan states that if we have used more than we've paid for, it will come out of our final check.
  • Nevada: I thought recent court cases had ruled against employers deducting amounts owed from the final check. Perhaps I am wrong.

    I have checked our FSA SPD and our severance policy. I think I can only make deductions from an ACTIVE employee. After reading both documents, I don't think my employee qualifies. It is very confusing.

    Here is one article I found. Though I can't vouch for the author, it was posted in the New York Times which gives it credibility to me.

  • That's interesting. I'll pass that article on to our payroll dept and see if they have any input.

    You've got me curious now! Why would an employer take that risk?
  • [QUOTE=Nevada HR;723116]

    You've got me curious now! Why would an employer take that risk?[/QUOTE]

    I believe that is the IRS's intent. Employees take a risk with the use it or lose it part, employers take a risk that the employee will use it all and then leave before they have fully funded the plan. We have never tried to withhold any balances owed from the final check. Overall we have had more owed than amounts left in, but we are still ahead due to our tax savings.
  • We use Manley for our flex spending. Right on the form the employees fill out and sign it states that if the employee is terminated the balance of the funds owed will be deducted from their final check.

    The employee has the use of his whole election until the end of the year. It doens't matter how much he's used by his term date or how much was deducted from his checks. If the final check isnt enough to cover the unpaid election, then that is a risk the employer takes.

    We have billed employees for the balances due the employer but as you can guess, that went no where.
  • Our Payroll Dept confirmed that upon separation from employment, we absorb the loss if the employee used more than what they paid thru payroll deduction.

    I also learned that our budget had a shortfall in that line item because the payout was much higher than anticipated.
  • Perhaps someone from HRHero will chime in and give us a legal point of view....hint hint
  • As far as I understand, a Flexible Spending Account under a Section 125 Plan can affect either the Employer or the Employee. The Employer may lose money if the employee terminates after using more money than they put in and the Employee may lose money if they terminate before using up their funds.

    At the same time, the Employer may gain money if the Employee terminates and leaves money unused in the fund or the Employee may gain if they receive more money than they contributed.

    This is the "Use-it-or-lose-it" portion of the plan. All that I have read indicates that you CANNOT require the employee to pay for any difference in the amount funded versus paid out - Ever. That negates the whole "Use-it-or-Lose-it" requirement.

    I don't know about the legalities of "bethk" plan. I think they should check into that though.
  • If employees don't extend participation, FSA coverage stops at the time of termination. However, employees can still be reimbursed for expenses incurred "prior" to termination. Any unused balances left in employees' accounts at the end of the period for which reimbursement can be claimed is forfeited.

    Your enrollment form dictates what you can recover at termination. If it says you can deduct $X per paycheck then you cannot recover the whole outstanding balance on termination. If you set it up so that you deduct $X per paycheck but the employee authorizes deduction form final pay of remaining balances then they have rights to still incur during plan year. You can also say that they authorize up to the amount incurred prior to termination if greater than what is already withheld. The key is what your election form says.
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