FAQ: How should an employer handle health FSA eligibility when employees are furloughed?
May 12, 2020
The answer depends upon whether the employees lost eligibility for the health FSA when they were furloughed, and how long the furlough lasts.
If they did lose eligibility, COBRA should be offered for any employee with an underspent balance. If they want coverage for the furlough period, they would have to elect and pay for COBRA. If they return to work in less than 30 days since the date they were furloughed, the employees would be reinstated to their previous elections, including the health FSA. If it’s more than 30 days, then they would be treated like new hires, with an opportunity to enroll in the health FSA if they choose.
If the employer does not wish for their employees to lose eligibility while on furlough, the limited guidance available (including the federal government’s own cafeteria plan) suggests three possible approaches:
- First, the employer could suspend the FSA, with no employee contributions and no FSA coverage during the furlough. Upon return, there would be no employee salary contribution collection in arrears. The employee is not responsible for salary contributions during the furlough, but the employee cannot be reimbursed for FSA claims incurred during the furlough period. The employee’s total annual FSA benefit either remains the same (with the employer picking up the difference) or reduced by the missed furlough amount.
- Second, the employer could suspend employee FSA contributions but continue FSA coverage through the furlough. Upon return to work, the employees would pay back the contributions they skipped while on furlough paying a new recalculated contribution amount over the remaining pay periods. Employees can incur health FSA expenses during the furlough, and the employee’s FSA benefit amount remains the same. The employer risks not collecting in arrears if the employee does not return to work.
- Third, the employer could pay for the employees’ contributions and continue coverage during the furlough. However, this third option comes with some additional issues. The employer should be careful to make contributions that do not cause the FSA to lose its excepted benefit status (i.e., employer contributions should not exceed $500 or an amount that matches the employee’s contribution).
Although the idea is that employees would resume paying their portion of the contribution upon their return to work (and their contribution amount remains the same as before they went on furlough), the risk here is that employees do not return and the contributions that the employer has made on their behalf were wasted.
Finally, another thing to keep in mind is that, according to guidance from the IRS released on May 12, 2020, it is possible for employers to amend their plans and allow employees to make mid-year changes to their FSA elections. See our article in this edition of Compliance Corner about this new guidance from the IRS for additional information.