In December, 1995, the Internal Revenue Service issued proposed regulations for rules governing cafeteria plans in connection with the federal Family and Medical Leave Act ("FMLA"). Prop. Treas. Reg. § 1.125-3 (December 21, 1995). This article summarizes several interesting points that are addressed by the proposed regulations concerning cafeteria plan elections, payment for coverage during a FMLA leave and flexible spending accounts. As you may recall, FMLA permits certain eligible employees to take up to 12 weeks of unpaid leave due to a serious illness, to care for a seriously ill family member or for the birth or adoption of a child.
CAFETERIA PLAN ELECTIONS
The proposed regulations first clarify that an employee who takes a FMLA leave may revoke an existing election under a cafeteria plan. The revocation is available for both health and non-health benefits offered under a cafeteria plan. The regulations recognize that FMLA also requires that the employee be permitted to elect reinstatement in the cafeteria plan upon return from the FMLA leave. The employer cannot require reinstatement in the cafeteria plan but rather must allow the employee the choice. The employee is entitled to be reinstated on the same terms that applied prior to the employee's FMLA leave.
The employee must be allowed to elect to continue the health coverage provided under a cafeteria plan during a FMLA leave, including participation in a flexible spending account. However, the employee remains responsible for the employee's share of premiums during the leave. The employer must continue funding the employer's share of such premiums. An employee who is out on a FMLA leave is not entitled to continued coverage for non-health benefits under a cafeteria plan, unless the employer provides such coverage for employees on other types of unpaid leave.
PREMIUM PAYMENTS
If the employee elects to continue cafeteria plan coverage during a FMLA leave, the proposed regulations allow three methods of paying for such coverage. The options include pre-pay, pay-as-you-go, and the catch-up method. Under the pre-pay option, the employee may, prior to commencement of a FMLA leave, prepay the amounts that will become due during the FMLA leave period. Such prepayments may be made on a pre-tax basis from any available taxable compensation. The employee, however, cannot pre-pay for cafeteria plan coverage on a pre-tax basis for coverage that spans two years.
The proposed regulations also allow an employee on a FMLA leave to make payments for continued coverage while they are on their leave, the pay-as-you-go option. Such payments are generally made on an after-tax basis, but may be made on a pre-tax basis to the extent the employee has taxable income during the FMLA leave period. If an employee fails to make the required premium payments, the coverage does not have to be continued. If the employer chooses to continue the employee's coverage and makes the premium payments on the employee's behalf, the employer is entitled to recoup those payments once the employee returns from leave.
The third method of payment is the catch-up method, which allows the employer to continue providing group health coverage to an employee while on a FMLA leave and recoup the employee's share out of the employee's salary once the employee returns from the leave. The employee and the employer must agree to this method of payment before the employee begins the leave. Contributions under this method may be made on a pre-tax basis upon the employee's return from the FMLA leave. The contributions may also be made on an after-tax basis.
There are a few limitations regarding the three methods of payment. The pre-pay option cannot be the only option available to employees on a FMLA leave. This method, however, does not have to be offered to employees on a non-FMLA unpaid leave. The catch-up option may be the sole option offered only if it is the sole option offered to employees on other types of unpaid leave. Further, an employer cannot offer employees on a FMLA leave a choice between either pre-pay or the catch-up option without also offering the pay-as-you-go option, if the pay-as-you-go option is offered to employees on other types of unpaid leave.
One final point regarding the payment for coverage. If the employee substitutes paid leave for unpaid leave for the FMLA leave, the employee is required to continue making payments for group health plan coverage under a cafeteria plan by the normal method used during any paid leave under the employer's leave policy.
FLEXIBLE SPENDING ACCOUNTS
If the employee participates in a health care flexible spending account ("FSA"), the employee generally has immediate and full access to the amounts of coverage elected under the FSA. However, if the employee terminates coverage under the FSA while on a FMLA leave, the employee is not entitled to receive reimbursements for claims incurred during the leave. If the employee elects to be reinstated in the health FSA after returning from the FMLA leave, the employee cannot seek retroactive coverage under the FSA for the leave period. The employee's level of coverage under the FSA is reduced on a pro-rated basis for the period during which coverage is suspended during the FMLA leave. For example, assume an employee elects a FSA for $1,200 of coverage and is making $100 per month contributions. Under the general rules, the employee is entitled to $1,200 of benefits from the FSA as of the first day of the coverage year. However, assume that the employee takes a FMLA leave after three months and chooses not to continue FSA coverage during the leave. After the leave, the employee is entitled to total coverage for the year of $900 ($1,200 - $300 [$100 times the three months of leave]= $900), less any reimbursements during the period of active FSA coverage.
SUGGESTIONS
Employers should review their cafeteria plans to determine if plan amendments are needed in order to take advantage of any favorable results that may be available under the proposed regulations. The plan language should allow for the reduction in FSA coverage during a FMLA leave, allow for revocations of elections for a FMLA leave and allow employees to elect reinstatement following a FMLA leave.