We have an employee that used more than contributed in her FSA while she was on a FMLA then personal leave. The plan year is over. The employee is now back. Can we ask her to contribute the balance at this point? I know we can’t make this request upon a termination but what about a current employee?
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Thanks very much for your question about FSAs.
Unfortunately, what you are seeking to do is not permissible under the Section 125 rules for FSAs.
To be a valid Section 125 insurance plan, FSAs must involve “risk-shifting.” This means that both the employee and the plan sponsor (employer) must assume some comparable risk of loss in the plan.
For employees, that risk comes in the form of the “use it or lose it” rules. If an employee contributes $2,500 to an FSA over the course of the year, but does not use those funds by the end of the year, then any excess is forfeited to the plan and this benefits the plan sponsor/employer.
So the plan sponsor/employer must also undertake some risk of loss. While this risk is typically found in early termination scenarios, it can also occur in other contexts, such as the one you’ve described.
The uniform coverage rules for FSAs require that the employee be eligible to receive the maximum amount of reimbursement he or she has elected to contribute for the year at any time during the coverage period, regardless of the amount the employee has actually contributed.
So if the same employee noted above elects to contribute $2,500 to the FSA over the course of the year, he or she must be entitled to use of that entire amount at any time during the plan year, even if the employee has only made a single paycheck’s contribution. If the employee leaves employment or otherwise stops contributing, but has spent more than this amount, then the plan sponsor must bear that expense.
If the plan sponsor/employer were permitted to require employees to reimburse any excess expenses, then the plan sponsor/employer would have no risk of loss and the FSA would not be valid.
So the general idea is that employees who participate in your FSA and who do not use the entirety of their contributions by the end of the year balance out any losses sustained by the plan sponsor for situations such as that in your inquiry.