Healthcare FSAs Uniform Coverage Rule – an Employer’s Risk

Risk

Under the uniform coverage rule, the full amount an employee elects under a health flexible spending account (health FSA), must be available from the first day of the plan year and must remain available at all times during the coverage period. It requires employers to reimburse expenses up to the full employee health FSA election amount, even if such reimbursements exceed the employee’s year-to-date contributions.

This means an employee can potentially terminate employment having been reimbursed under the health FSA for more than they contributed up to the time of their termination.

EXAMPLES:

  • Tom enrolls for the first time in his employer’s health FSA, electing the full 2019 IRS limit of $2,700 for their April 1, 2019 – March 31, 2020 plan year.  Tom resigns effective April 30, 2019. By the end of that month, he has paid $225 into his health FSA account via salary reductions. On his last day of work (April 30, 2019), Tom submits a claim to be reimbursed for $1,900 of medical expenses that he incurred for his sons recent surgery on April 22, 2019. Tom’s employer must reimburse the full $1,900, even though he only contributed $225 before his employment ended (assuming the expenses are adequately substantiated) and the employer may not recoup the difference. 
  • Mary enrolls in her employer’s calendar year (1/1- 12/31) health FSA, electing the full 2019 IRS limit of $2,700. Mary is paid semimonthly. Throughout the year, Mary submits medical expenses totaling the full amount of $2,700.  Mary resigns effective 11/15, leaving her health FSA overspent (i.e. more was reimbursed than contributed via payroll deduction) by $337.50. Mary’s employer may not withdraw the balance from her last paycheck. 

The uniform coverage rule is part of the risk an employer takes when establishing a health FSA.  The point of the rule is that the employer must bear the risk of loss (i.e. operate like an insurance plan, rather than a mere reimbursement account) in order for the arrangement to qualify as a health FSA.

Although the uniform coverage rule is a risk, in my experience, most employers with health FSAs when looking at the plan year as a whole, do not pay out more in claim reimbursements than they receive in employee contributions. In fact, because of the risk of the  ‘use it or lose it rule’ for employees which generally requires employees forfeit to the employer any unused amounts left in their accounts at the end of the plan year, most employers total contributions exceed total reimbursements for the year.

 

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