Question: While an employee is out on an approved FMLA leave, can the employee use their medical and/or dependent care FSA money while on leave? If not, what if they are still contributing to the plan?
Answer: The answer appears to depend on whether the employee or the employer has continued the employee’s flexible spending account (FSA) contributions during the Family and Medical Leave Act (FMLA) leave and also whether it is a health care or dependent care FSA.
Regarding health care FSAs, it appears under Internal Revenue Service (IRS) rules that if the employee is on paid leave (i.e., using paid sick or vacation time during the otherwise unpaid FMLA leave), the employee continues coverage under the FSA as if she was not on FMLA leave since she continues to make contributions to the FSA through a regular payroll deduction. According to the IRS regulations found at 26 C.F.R. Sec. 1.125-3 Q-6(B)(1): “(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.” (The IRS rule is available online at https://www.law.cornell.edu/cfr/text/26/1.125-3.)
If the employee is on unpaid FMLA leave, she likely cannot claim reimbursements under the FSA plan if she is not making payments to the FSA or if the employer is not covering the contributions. According to the rule: “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.” 26 C.F.R. Sec. 1.125-3 Q-6(B)(2)(i). (The IRS rule is available online at https://www.law.cornell.edu/cfr/text/26/1.125-3.)
However, if the employee makes contributions under the three options provided by the IRS rule, the employee likely can use the FSA during the unpaid FMLA leave. The three options for employees to elect payment are to prepay for the FSA contributions before the FMLA leave, pay premiums during the leave on the regular payment schedule, or “catch up” after the leave so that the employer advances the premium payments and the employee repays them after the leave. See 26 C.F.R. Sec. 1.125-3 Q-3. (The IRS rule is available online at https://www.law.cornell.edu/cfr/text/26/1.125-3.) (These are the same options employees may use to pay for health insurance during an unpaid FMLA leave as well.)
Regarding dependent care FSAs (i.e. FSAs used for childcare), FSA claims are only allowed for temporary absences from work, defined under the IRS regulations as absences of two weeks or less. According to the IRS rules, dependent care “expenses are employment-related expenses only if they are for the purpose of enabling the taxpayer to be gainfully employed” though there is an exception for short, temporary absences of two consecutive weeks. See 26 C.F.R. Sec. 1-1.21(c)(2). (The IRS rule is available online at https://www.law.cornell.edu/cfr/text/26/1.21-1. ) If employee has continued contributions to the dependent care FSA during the FMLA leave, it appears she may then make use of the FSA after her return to work.
Because of the complexities of tax law and the FMLA, you should consult a tax attorney or other tax professional for assistance on this issue.