Can Employees Make FSA Contributions While on FMLA Leave?
Employees can revoke or continue coverage of their health flexible spending accounts while on unpaid leave taken under the Family and Medical Leave Act. If they opt to continue coverage, they can either stop making payments or keep making payments for the entire leave period.
For those who want to keep their FSAs funded, IRS Regulation 1.125-3 offers three payment options: prepay, pay-as-you-go and catch-up.
With the prepay option, employees pay the total FSA contributions due for their entire FMLA leave period before their FMLA leave begins. Employers cannot mandate the prepay option; it can only be voluntary.
This payment approach isn't always feasible for the employer or employee. For example, if the leave is unplanned, you won't be able to deduct the payment from the employee's final pre-leave paycheck. Or if the leave is expected to last a long time, the employee's finances may not be able to withstand having the full FSA amount taken from his or her paycheck.
Prepay works best when the FMLA leave is planned and has a short duration. The payments are typically pretax amounts, since they are made as a payroll deduction under the company's cafeteria plan. However, the IRS prohibits pretax contributions for prepayments when the FMLA leave spans two cafeteria plan years. In this case, "only the premiums for coverage during the first plan year can be prepaid on a pre-tax basis," according to a report by Infinisource Benefits Services.
With the pay-as-you-go option, employees submit FSA payments on the same schedule as if they were not on FMLA leave. For example, the employee can keep making regular contributions each pay period to the employer via a mutually agreed-upon payment method such as check or money order. These installment payments are not processed through payroll deductions and are therefore after-tax amounts.
With the catch-up option, the employer and employee agree that the employer will pay the employee's FSA contributions while he or she is on FMLA leave and the employee will make special catch-up contributions to repay the advanced amounts when he or she returns from leave. The catch-up contributions may be pretax if done through payroll deduction.
In addition, the employee's normal FSA salary reductions will resume for the remainder of the plan year when he or she returns from FMLA leave — unless the employee changes his or her elections.
Note that employees who discontinue their FSA coverage while on FMLA leave have the right to be reinstated in the health FSA plan upon their return from leave. The same goes for employees who lost FSA coverage because they failed to make the required payments during FMLA leave.
Finally, be aware that the three payment options have many nuances, so consult with your benefits adviser before implementing any of them.