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Employer Trying To Get FSA Overspend

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I was recently stumped by this recent reader question about Flexible Spending Accounts and was hoping someone here could shed some light on it.

I recently read an article dated May 10, 2005 about Flexible Spending Accounts. You stated that “If you leave the company at any time.., you aren’t required to pay back the amount you’ve already spent and your employer foots the bill.” Where did you get that information? My husband is leaving his job after 6 months and we have already used the money from his account. His company is trying to tell him that he has to pay this money back. Do you know if there is an official IRS regulation or anything else that we can site? We are afraid that they are going to take it out of his last paycheck. Can they do that? How can we stop them?

When I scoured the IRS.gov site about Flexible Spending Arrangements, I could only find the “use-it-or-lose-it” provision but not anything about paying back an FSA overspend. I could only recall from my own experience and those of people I’ve talked to about this as my backup but didn’t know if there was some codified rule out there I was just missing. The reader’s husband is leaving this Friday and was hoping to have some good ammunition to fight the company so if you know of anything, please do share either via email or in the comments below.

Thanks!

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39 Responses to “Employer Trying To Get FSA Overspend”

  1. Steve says:

    I enjoy reading this website on a daily basis, but rarely, if ever, leave a comment. However, I felt it necessary to leave a comment for this post.

    My opinion of society as a whole drops a notch whenever I see something like the question raised above. Doesn’t this person realize that what they are trying to do is unethical. This is stealing.

    You agreed to put away, for example, $100/month into a flex spending account because you realized the benefit of not having to pay taxes on this money. Due to the unpredictable nature of health care costs, the flex spending regulations allow a person to withdraw the full amount they have pledged to deposit into their account before the actual money is deposited. Thus, if you pledged to put $100/month, you can request all $1200 right now even though the year is not even half over and you have technically only deposited $500 into your flex spending account to date.

    Now you have withdrawn all $1200 in pre-tax dollars, and are about to leave your current employment and are trying to figure out how to get away without paying back the $700 you still owe your flex spending account. I don’t know what the current regulations/laws are, but I’m of the opinion that your employer or whoever implements your flex spending account should be allowed to go after people who try to cheat the system like this.

    You signed up for the flex spending program, and based on your question, you understand the principles behind it and how it works. You put money in, you take that money out when you need it, and that money doesn’t get taxed. Please grow an ethical backbone and do the right thing – pay back whatever you owe to the system.

    • Tracey says:

      To Steve:

      I have only participated in a flex spending account once and had put away about $500 of my own money thinking I had a year in which to use it all, only to learn that when enrollment came around in May, that WAS THE END of the year and I lost all of my money. Who says that is fair? Now I am in a position of having used that money (not all, but more than $400) for medical expenses and I am going to be laid off at the end of April because of the economy (my whole office in Atlanta is closing). If the rule is “use it or lose it”, then I think it is fair that sometimes the employee comes out ahead. Why should the company always benefit from the employee not using all of their FSA?

    • Duh says:

      Companies make a lot of money off of unspent money in employee’s FSA accounts. This includes people not using the money by the year’s end, of course…but ALSO it includes money left in the account when the employees quit (voluntarily or due to downsizing or being terminated). For the employee and the employer, the risk is the same.

      Please grow an ethical brain to go along with your ethical backbone.

  2. sixpack says:

    I think this is a grey area. I believe they can ‘try’ to get their money, but I don’t think you are obligated to pay it. For example, if you were to go on a “Leave of Absence” and it so happens that you terminate before the end of the year, it would be hard for the employer to get their FSA money.

    I think they can legally take money from your last paycheck to offset some of the FSA reimbursements that weren’t fully funded YTD. But otherwise, I’d have to say that the employer is in a very weak position.

    To be honest, most of the time employers forgive this money and cut their losses.

  3. Jon says:

    I understand the ethical dilemma but in my personal opinion, use-it-or-lose-it policies tend to balance out for the company. The employer gain some from the excessive funding that isn’t used by the deadline, and they lose some in these instances, but I’d bet if you make the calculations, especially over multiple years, the company comes out pretty even.

    My conscience doesn’t have a real problem with not paying back the overspend. Just my humble opinion, though.

  4. anon says:

    I think the rules on payback of negative balances vary by employer, since the IRS offers no guidance on the topic. Where I work, they eat the balance if an employee leaves early. I’d say check the rules of your specific plan – you most likely would have signed something when you joined the plan that would have included the rules on negative balances.

  5. RootAnn says:

    When I left my employer almost four years ago, we had used the whole yearly amount from the FSA-type account while only putting in about 45%. The company decided to pay me back the money I’d put into it, but didn’t charge me for the money I’d taken out. (Let’s say I put in $450 out of $1000. I had used the whole $1000 for medical bills up to that point and they reimbursed me for that. Then, when I left, they gave me back my $450 (I think post-tax). I ended up getting ~ $1450 (+/- tax effect) for $0.)

    However, I must add that they went the other direction on the vacation-pay front. I’d used what I’d accrued, but they took away all the vacation I’d earned up to that point and made me pay back what I’d used that year. ?? And, they tried to short me a day of pay and added much confusion to the health insurance front. But I did get that taken care of, although it took hours of time on the phone and many months of paperwork and red tape. Companies can be so confusing.

  6. Art Dinkin says:

    I am not an expert on health insurance, but I went through this same senario with a client within the last 18 months. The rule is simple. When you leave your employer you account is locked. If you have spent more than you have paid in at that point, the employer is required to make up the difference. The reverse is also true. If you have spent less than you paid in, then your employer is entitled to keep the difference.

    The government’s thought here is that it is a wash. Some employees will loose their unspent balances and the employer can use it to offset the expenses of those who leave before fully funding their account.

    A couple of clarifications. First, the area is NOT grey. The rules are clear and well established. The employer is allowed to “ask” the employee to fully fund their spending. In that case the employee should thank for the employer for the opportunity, but decline.

    It is 9 pm and I am at home so I do not have any references available. If you need references please contact me (all my information is on my blog, http://www.momentonmoney.com).

    Art Dinkin, CFP

    • Hookem says:

      If you change employers during the year can you get reimbursed for expenses that were not reimbursed from any other source prior to the start of your second employment? In othr words, if you start a second job and open an FSA there on June 1 can you get reimbursed for an expense incurred in May that was not reimbursed by your previous employer’s FSA?

  7. thc says:

    Steve and Art are on the money. If you have spent more than you put in, you owe. This ain’t socialism, not yet, anyway.

  8. theWizard says:

    Go back an read the rules of your plan to see what it says.

    My understanding is that some rules can vary plan to plan. I would expect most would be as Art said above. When you leave the plan stops. You can’t file for money still in the account if the expenses occur after you leave employment. Also your employer can’t require you to contribute more than the standard per paycheck amount to cover a shortfall. If they ask politely decline.

    Even if everyone here does not agree its “FAIR” those is the rules of the game all agreeded to play by. The employer keeps unused balances and cover shortfalls when someone leaves.

  9. jt says:

    From a previous employer it is my understanding that the FSA, in general, is a mutual risk proposition. The employee risks losing money they do not use during the given year, while the employer risks losing money they pay out early on during the given year (should the employee leave).

    Nice blog…never post, but read daily.

    jt

  10. Steve says:

    I’m still amazed at how people can rationalize whether something is right or wrong by whether they see someone getting hurt.

    Here everyone seems to be of the belief that “my employer doesn’t get hurt because of all the flex spending money people fail to use and thus lose, thus no crime, no foul”. This is the same type of rationale people often rely on to justify credit card fraud – “only the credit card companies are getting hurt, so no real harm done, they make enough money anyway”. Of course, this ignores the fact that the credit card companies simply pass on all of this expense to the vendors and consumers, resulting in higher costs for goods/products, etc.

    Here is a more relevant case. A former employer of mine began offering a flex spending plan at the request of its employees. They were willing to eat the general administrative costs of the plan since it was considered a nice perk that would benefit the employees. They realized that there would be a few people who might foolishly fail to use all of their flex spending money, and thus lose it. The company always felt that your money was your money, and thus decided (but did not publicize in any way) that any flex spending money someone lost would magically make its way into that person’s year-end bonus.

    2-3 years later, this company terminated the flex spending plan. The reason, the costs involved in offering the plan ended up being significantly higher than what the company expected due primarily to employees leaving the company with negative balances in their flex spending accounts, thus leaving the company having to pay the bill, so to speak. The secret policy of passing unused funds back to the employee as a year-end bonus quickly went away, with these funds instead used to try and cover the unexpected expenses of the plan. Unfortunately, shortages in the plan fund due to employees leaving the company greatly exceeded any unused money in the plan. As a result, the plan was terminated and no one benefits from it anymore.

    I know there is the argument that the law apparently permits this, so it must be ok (although I’m still amazed that the regulations/laws currently permit this-although we all know that the law can be incredibly screwed up at times). I guess I’m pretty much alone in the feeling that there is a difference between ethical/moral obligations and legal obligations.

    I see all of the above as another example of our current societal attitude of “what’s in it for me, damn everyone else”.

    Ok, I’m getting off my soapbox, I’m uncomfortable up here anyway.

    • jim says:

      You are definitely right in that you should judge an action’s ethical or moral correctness on the basis of who gets hurt because that’s simply wrong – the act is wrong on its own, not in who it hurts; but unfortunately people do justify things using this logic.

      I’m not trying to justify overspending an FSA (I did this when I left my old job) in this particular case, just trying to answer a reader question. I do agree that spending money that is not rightfully yours is wrong and, if given a choice, I’d probably change what I did in the past but that’s beyond the scope of this particular post.

    • Lloyd says:

      There is no ethical dilemma here though. As others have said, there is mutual risk with an FSA that you BOTH agree to. Let’s turn it around. Let’s say the employer decides to lay you off. Do you think they’re going to pay you back for what you didn’t use? Of course not.

  11. I faced this exact thing a few years back, and was never asked to repay the difference. In fact, I don’t think there was a mechanism for doing so if I had wanted to. As Art stated, the thinking here is that the use-it-or-lose-it clause makes it a wash for the employer (i.e., they get to keep unspent funds). I’d be willing to bet that the employer still comes out ahead, at the cost of employees that mis-estimate their spending. I’d much rather see a system in which you are allowed to carry the funds over to the next year, but your allowable withholding limit is then reduced by that amount. In that case, nobody is able to build a huge stash of cash in their FSA, and yet nobody gets burned.

  12. Kelly says:

    I’m a benefits administrator and can tell you that an employer is NOT allowed to seek repayment of FSA monies as long as the employee’s claims were properly substantiated before they were paid out. (That’s not to say that some employers won’t try it anyway)

    The people who are scolding and casting moral judgments need to lighten up. This isn’t a moral issue. It’s an IRS issue :) Most employees can’t predict during their annual enrollment period that they’ll be terminating employment in the following year. Most employees don’t even know how their FSA works, much less possess the savvy to elect the maximum contribution and schedule LASIK or orthodontics in the first week of January when they know they’ll be giving their two-week notice at the end of January. However, employers are aware that the risk is there and if it happens, they have no recourse against the employee.

    the rules:
    The uniform coverage rule outlined in the Section 125 regulations states that the maximum amount of reimbursement from a health FSA must be available at all times during the period of coverage (properly reduced as of any particular time for prior reimbursements).

    The Use-or-lose rule of the Section 125 regulations states that an FSA must satisfy all the requirements of section 125, including the prohibition against deferring compensation. In general, as discussed under “No deferral of compensation”, in order to satisfy this requirement of section 125, all benefits and contributions must be used by the end of the plan year (or grace period, if applicable),or are forfeited.

    Any gains enjoyed by the company as a result of forfeited FSA dollars (funds that weren’t used by employees) can be used to offset any shortages caused by employees who have depleted their FSA and terminate before the end of the plan year.

    Essentially, this means that

  13. Pete says:

    It’s interesting to read the moral/ethical dilemma expressed when you also hear employees complain that the “use-it or lose-it” provisions seem unfair. If both the “cashing out” and “use-it or lose-it” are within the law, isn’t this properly a two-way street. I would guess that some might say the ethical dilemma doesn’t exist on losing your unspent contributions, but I would argue that it does, if both actions are ‘legally’ okay. What I find disagreeable is that your employer will openly and honestly inform you about your legally justified potential for loss, but not the same about what seems to be your legally justified potential for gain. My employer actually said “I’m not supposed to tell you this…but” which really made me suspect THEY are the ones trying to gain.

  14. Steven says:

    Kelly do you have links to the actual rule for proof. I wish to answer the citation on wikipedia.org see link below. If you go to the link please refer to the paragraph under the title “Pre-funding”

    http://en.wikipedia.org/wiki/Flexible_spending_account

    You may answer the citation yourself.

  15. Lyn says:

    I too think people should lighten up. We had this very dilemma. My husband was downsized two weeks into a New Year and only notified about four weks after open enrolment. That year we elected the maximum because our daughter was due to have a series of operations starting in January. Because of his severence package, his company provided our health insurance coverage through April, and instead of severance pay, they provided something called continuation pay through March. This alowed them to deduct our contribution through ten. When we submitted the EOBs for our daughters surgeries, we thought we would only colect that which we had paid in and we would not be able to take the taxable advantage that we planned for at open enrollment. That was not the case. The company reimbursed us, and with receipts for bandages, etc. and our bi-annual dental appointments, we were paid almost $4400, but yet we paid in only $1300. We tried to return the money and were told by the benefits administrator that the IRS would not allow them to receive the monies offered, nor for them to ask for it back. I, to, felt this was immorale for me to keep it, but after lengthy discussions with the HR administrator, she made me understand. It is a balance between all contributors. You can judge me for this if you choose, but only 1 individual can judge my heart and it is not any one who would be on the Internet. We did not enroll for the maximum deducation to take advantage of anything, beleive me, we would rather my husband have kept his job – just as the other 25 or so guys would have preferred. Yes, we benefited this year, but many years it has been the other way around. I do know that where there is an angel people wil find it – and in those cases, people are taking advantage. However, it is not my place to judge.

  16. Anonymous says:

    As a Flexible Spending Administrator the employer takes on this risk when they decide that they want to implement a Flexible Spending Program for their employees. If the employee leaves they are not required to the pay the money back. The employer can request it, but cannot force the employee to do so unless this stipulation is documented in the company’s Section 125 documenation (which is not usually the case). This document should be easily accessible to all employees and a Summary of the Plan Document should be presented to you at the time you choose to take on a Section 125 benefit.

    I know some may say it is unethical, but what about the employee that terminates and does not use all of their FSA money before they terminated and does not have enough claims to submit to receive this money. They lose it and the employer gets it back to use against Section 125 Administration Fees or a benefit that will apply to all of their employees?

  17. Sam says:

    To fivecentnickel.com.

    There is a plan that will allow you to take your money with you. It is called a Health Savings Account (HSA). HSA’s have become very popular in the last few years. The only issue that it is attached directly to a high deductible medical plan. The employer must choose to use this type of plan for their group plan. A lot of employers have an HSA and Traditional Plan in place for their employees to choose from. This plan allows employees and employers to contribute to this account on a pre-tax basis. You use this account to pay for all of your medical expenses including prescriptions. All of your Dr. visits (usually with the exception of a one annual exam paid at 100%) and prescriptions are processed towards your deductible (usually around $2,000) and you can use your HSA to pay for these charges. Once you have met your full deductible your visits and prescriptions are paid out at 100%I. If you have money left in the account the next year, it will just rollover.

  18. CJ says:

    Ok, you guys seem knowledgeable…

    I left my employer at my own willingness in April of this year. It is now July and they are still depositing funds into my Dependent Care Account. Obviously, these funds are not coming from my pay because I no longer work there.

    Can I make a claim against these funds through the flex company? If I do, could they come back at a later date and make me pay them back?

    Will this have any adverse affects on me come tax time?

    Thanks in advance!!

  19. jim says:

    CJ – I would notify your employer of these extra payments, they’re not yours so they can claim them back once they audit and discover the error. It’s like getting extra paychecks, you only cause yourself headaches by using them.

  20. fer says:

    I almost lost $5000 to an employer by being signed up to a Flexible Spending Account in error. The employer had presented it as a Dependent Care Account and described it to the staff as a type of insurance available to cover subscribers in the event we have to leave work to care for an ill dependent. I’ll give this manager the benefit of the doubt and call it confusion. None-the-less, I had to fight to get my $5000 back when I terminated employment under the use it or lose it rule. I could never have used it if it had been a Flexible Spending Program for Dependent Care. I have no dependents!

    To make matters worse, when the employer finally did send my refund, the Unemployment Benefits Administration arranged an eligibility review meeting with me to determine whether to treat this refund like “wages” and deny several weeks of check payments.

  21. Hello says:

    What an idiot. Pay back what you owe. You borrow money, you need to pay up now. Its such a wonderful employee benefit program. I use it all the time.

  22. PHR says:

    Kelly has hit this one out of the park. There is just one caveat. Your qualified expenses must be incurred prior to you leaving employment. Also this rule does not apply to dependent-care reimbursement accounts.

    http://www.irs.gov/publications/p969/ar02.html

    A qualified Jim

  23. Poofeybug says:

    Wow. Tough, tough, tough crowd! I left a position in October and was not required to pay any kind of balance. It never even came up. In my mind it is all baanced by the fact that the previous year I left $25 in the account because the doggone debit card was declined twice in late March and I didn’t have the psychic capital to fight the small loss. Leaving in the following October with a negative balance I hardly thought I was morally bankrupt and ripping off my employer — jeez! I don’t think employers out there lose sleep and consider themselves bloodsuckers when people don’t use all the funds they put in and it’s forfeited to the overall admin costs of the plan, right?

  24. jrc says:

    See prop reg 1.125-1 Q 7: FSA will not qualfiy for tax favored treatment under IRC 105 or 106 if the effect of the reimbursement arrangement eliminates substantially all of the risk of loss to the employer maintaining the plan. Which means that if there is no employer risk they lose the tax favored treatment. There has to be a risk for both employer & employee. The employees risk is that they dont use the entire amount of annual contribution & the employers risk is if the employee leaves & has used more than they have contributed.


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