IRS Updates

Family Medical Leave and 125

On October 17, 2001, The IRS issued Final Regulations regarding the effects of leaves of absence under the Family and Medical Leave Act of 1993. These Regulations are effective for plan years beginning on or after January 1, 2002.

This is meant to be an overview and any particular situation that may occur should be discussed with TaxSaver.

The Final Regulations

FMLA has two basic requirements. First, employees taking an unpaid FMLA leave of absence are entitled to continue group health coverage (medical, dental, vision and health FSAs) under the same terms/ conditions as before the leave. If the employee chooses to continue coverage, the employer must continue to pay the employer's share of the required premium contribution and the employee must continue to pay their share. If
the employer offers other benefits, they need not be continued unless they are continued for employees on non-FMLA leave. Secondly, employees whose coverage terminated during the leave (either for non-payment, revocation or loss of eligibility) can have their benefits reinstated upon return from a FMLA leave without any
restrictions.

The regulations require that the employer offer one of the following options for FMLA leave.

  • Option 1: Revoke Coverage. Employees may choose to revoke health coverage in lieu of continuing coverage. Coverage may cease (subject to FMLA reinstatement rights).

    The regulations provide that an employer may mandate reinstatement of coverage upon return from an FMLA leave but only if the employer requires reinstatement of coverage upon a non-FMLA leave. Many plans only reinstate coverage within 30 days and allow employees to make new elections if they
    return more than 30 days after the non-FMLA leave. Such plans could not forcibly reinstate a particpant's cafeteria elections if the employee returns more than 30 days after the FMLA leave began.

  • Option 2: The employer may require that health coverage continue but allow the employee to discontinue contributions. The employer may recoup the employee's share when the participant returns from leave. The employer may only force continuation of coverage during unpaid leave if and only if the employer requires continuation of coverage during a non-FMLA leave.

The regulations contain three payment options for those participants on unpaid FMLA leave who wish to continue benefits (payments made during a paid leave must be made in the same manner as active employees, e.g. payroll reduction).

Three Options for Payment

  • Pre- pay
  • Pay as you go
  • Catch up

Pre-pay - A Cafeteria Plan may allow employees to pay (either pre-tax or after-tax) their share of the contributions, prior to the leave. This method can not be mandated and may not be the sole option offered. The employer may offer this method of payment even if not offered to non-FMLA unpaid leave. If this option is elected, the employee can only pre-pay the pre-tax amount for coverage to the end of the plan year. To pre-pay for coverage in another plan year, the employee must do so on an after-tax basis or elect another payment option.

Pay as you go - Employees may elect to pay their share of the cost on the same schedule as payments would be made if the employee was not on FMLA leave, or any other schedule permitted by the DOL's FMLA regulations (COBRA's schedule, employer's existing schedule for employees on unpaid leave, or agreed upon
by the employee and employer). Normally, the payments are made after -tax unless there is a paid leave period. If the employee fails to pay while on leave, the employer is not obligated to continue coverage. Employers may require that coverage continues while on leave but allow the employee to discontinue their contributions. If the employer requires coverage to continue while on leave, the employer may recoup the employee's share of the unpaid premiums when the employee returns to work. This can be the only option offered by the employer.

Catch-up - Employers continue the coverage and pays the entire contribution during the leave. The employer recoups the employee's share of the contribution when the employee returns from leave on either a pre-tax or after -tax basis. If elected, the employer and employee must agree that (1) the employee elects to continue health coverage while on unpaid leave; (2) the employer assumes responsibility for advancing payments on the employee's behalf during the leave; (3) the advanced amounts must be paid back by the employee when
they return from leave. This option can be the only one offered, if it is the only one offered for non-FMLA leave. As discussed above, this option may be used by the employer without pre-agreement, if the employer requires that coverage continue and the employee fails to pay their share while out on leave.

Effect on Health FSA

If coverage is revoked, or contributions are not received under pay-as-you-go, two options exist for level of coverage.

  • Proration

    The employee may elect to reinstate a level of coverage that is reduced by the amount of contributions missed during leave. For example, assume employee A elects $1,200 for the year and has a 3 month FMLA leave of abscence. A does not elect to continue and Emploer does not elect to continue it for them. When A returns, the employee may elect to have $900 reinstated. Expenses incurred during the
    3 month period would not be eligible.

  • Reinstatement

    The employee may elect to reinstate the level of coverage in effect when the leave began provided the employee pays the missed contributions. For example, if the leave commenced April 1, and the employee was out 3 months, the employee would contribute $150 after returning July 1 for the balance of the year. Expenses incurred during the 3 month period would not be eligible.

FSA Catch-up

If the employee chooses pay-as-you-go for an FSA and then fails to pay the required contribution, the employer may continue such coverage on behalf of the employee and then recoup the missed contributions when the employee rerurns from leave.

Enrollment Privileges

Employees out on FMLA must be allowed to participate in open enrollment if active employees are permitted to participate in annual enrollment.