It’s tricky business: Leaves of Absence for Health FSA Participants

A Flexible Spending Account (FSA) participant is going on maternity leave. What to do? With other employee benefits, the answer is more straightforward, but a Leave of Absence (LOA) as it relates to an FSA is particularly tricky. With the Health FSA, the full plan year election is available to the participant on day 1, even though they haven’t yet funded the election. If your participant was planning ahead and elected their annual contribution amount to specifically cover things like birthing expenses, conceivably, the participant could be reimbursed for all of those expenses incurred while on leave, take reimbursement and then elect not to return to work, leaving the employer with perhaps the inability to recoup the lost contributions.

So, what are the alternatives? Is it possible to help your employee without harming the employer?

Essentially, an employer has two options which must be applied consistently across all participants taking a LOA:

1. Revoke FSA coverage while on leave. This means the employee’s participation in the FSA will be terminated while the employee is on leave.  Upon return from leave, the employee is eligible to re-enter the FSA plan with two election options:

1. 1. continue with the same per-pay-period contribution as before the leave which would reduce the election by the amount of the missed contributions while on leave.  This means any expenses incurred while on leave will not be eligible for reimbursement, or
   2. enter the plan with the original plan year election which would increase the per-pay-period contribution and allow the participant to then submit expenses incurred while on leave.

2. Continue FSA coverage while on leave. The entire election, less previous reimbursements, is available to the participant during the LOA under this option. Contributions to fund the election that would have occurred while the employee was on leave can be handled in three ways:

1. 1. Pre-Pay contributions before the leave. This option assumes the leave is pre-planned and contributions are made via increased payroll deductions prior to the leave.
   2. Pay-As-You-Go by sending the employer an after-tax payment each month while on leave (under FMLA or COBRA). If a participant neglects to submit payment, their participation in the plan is ended and they will not be allowed to submit claims.
   3. Catch-Up payments upon return.  The Catch-Up option puts the employer at risk because eligible claims are processed while on leave before the employee returns to make catch-up contributions.

FSA plan documents generally do not identify which option the employer has elected to use.  This should be included in the employer’s internal policies and procedures regarding Leaves of Absence and, again, should be applied uniformly to all participants, or may make both options available to all participants and ask the participant to choose which method suits them best.

I’ve attached our LOA form for Health FSA participants, I hope you find it helpful as you consider your Leave of Absence policy for this tricky benefit.