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FSA Deductions from final paycheck

If we have an employee who elected 1000 a year for Flexible spending and at time of termination only had 500 deposited into their spending account is it legal to deduct the 500 not deposited assuming they had already used up the 1000 at the beginning of the year/


  • That's what I thought. I called the IRS and they no longer have a phone line to support FSA/Section 125. They told me to go online and research but I am having trouble finding something that says you cannot.


  • rrupert
    rrupert ✭✭✭

    It is also my understanding that you can NOT take out the extra even if the person has already taken 100%. That is the employer side of employee "forfeiture" part if not used. Check out the "uniform coverage rule" under Section 125 plans "This aspect of Section 125 allows an employee to be reimbursed for qualified medical expenses that exceed their contributions to date. While this is a great benefit for the employee, it poses a potential risk to the employer. A case in point is when an employee terminates with a negative balance in their medical FSA. This risk should be offset because some other employees do not spend all of their FSA funds, so the risk is minimal.

    This rule states that for the medical expense account, a participant may claim the full amount of their annual election even if they have contributed only a portion of the total. For example, Sue Summers decides to contribute $480 for the year to her FSA account. To accomplish this, $20 is deducted pre-tax from each of her 24 payrolls for the year. Her plan starts in January. In March, Sue experiences a medical expense that costs $400. To date, she has contributed only $20 on six payrolls, meaning she has only $120 actual dollars in her FSA account. However, due to the uniform coverage rule she can claim and be reimbursed for the full $400 because of the assumption that her bi-weekly contributions will continue and she will eventually contribute the $480 total. This honor system is a huge advantage for participants, and allows them to experience medical expenses at any time of the year with no worry about having the funds available at the time the expense is incurred.

    Uniform coverage applies to the medical FSA only; it does not apply to a Dependent Care FSA. With a Dependent Care FSA account, a participant's reimbursement may not exceed the balance in the FSA account at the time the claim was made."