Health FSA uniform coverage rule

(Ref. CCA-1217103-09)

The Health FSA uniform coverage rule says employers must make the full annual amount elected by the employee available to pay or reimburse eligible medical expenses on the first day of the plan year.

Employers should be aware of the Health FSA uniform coverage rule.

Risk to employer

This requirement to pre-fund a Health FSA can leave employers open to some loss when employees use and then abandon the benefit.

For example, for the current plan year beginning January 1, employee J. Smith elects to contribute $2,600 to their Health FSA through bi-weekly pre-tax salary deductions of $100.

On January 21, Smith’s oldest child suffers a broken arm in a bicycle accident; Smith pays $800 in deductible and other out-of-pocket medical expenses.
On January 24, Smith submits the $800 claim to the Health FSA for reimbursement.
On January 27, although only $200 has been paid into the Health FSA from salary deductions, the full $800 is reimbursed to Smith.
On February 3, Smith submits a letter of resignation effective February 14.
When Smith leaves the company, only $400 has been paid to the Health FSA. The employer has no recourse to collect additional funds pledged for the year and incurs a $400 loss.

Ways to manage Health FSA uniform coverage risk

Employers weigh the benefit of allowing employees to pre-tax the full IRS contribution limit based on a number of factors:

Anticipated employee turnover rate;
Overall tax savings via Health FSA pre-tax contributions;
Value of higher benefit to employee goodwill;
Amounts likely to be surrendered back to the employer for administrative expenses from unused fund balances at the end of the plan year.

If it turns out that the risk of loss is unacceptable, the employer may limit annual Health FSA contributions to less than the IRS allowance.

Here is the official IRS ruling:

The cafeteria plan rules require that a health FSA provide uniform coverage throughout the coverage period (which is the period when the employee is covered by the plan). See Proposed Treasury Regulations Section 1.125-5(d).

Under the uniform coverage rules, the maximum amount of reimbursement from a health FSA must be available at all times during the coverage period. This means that the employee’s entire health FSA election is available from the first day of the plan year to reimburse qualified medical expenses incurred during the coverage period.

The cafeteria plan may not, therefore, base its reimbursements to an employee on what that employee may have
contributed up to any particular date, such as the date the employee is laid-off or terminated.

Thus, if an employee’s reimbursements from the health FSA exceed his contributions to the health FSA at the time of lay-off or termination, the employer cannot recoup the difference from the employee.

CCA-1217103-09