The Internal Revenue Service recently issued proposed regulations relating to the effect of the Family and Medical Leave Act (the "FMLA") on the operation of cafeteria plans and health Flexible Spending Accounts ("FSA") maintained pursuant to Section 125 of the Internal Revenue Code. These proposed regulations are consistent with current FMLA regulations, and provide guidance on the cafeteria plan and FSA rules that apply to employees in circumstances to which the FMLA and its regulations also apply. The FMLA requires employers to maintain coverage under a group health plan for employees taking FMLA leave (but the employee on FMLA leave is responsible for paying the same portion of the costs that he or she paid while he or she was working) and to restore benefits to employees upon their return from FMLA leave. The proposed regulations attempt to explain how these requirements apply to health coverage and other benefits offered through cafeteria plans and FSAs.

The proposed regulations reaffirm that a group health plan offered under a cafeteria plan or FSA is still a group health plan, and is therfore subject to all applicable FMLA regulations. Thus, as long as the employee continues coverage, the full amount of such coverage must be available to the employee at all times, including the FMLA leave period. Also, the employee must be allowed to be reinstated upon return from FMLA leave where the employee's coverage was terminated during the leave, whether by revocation or by non-payment of premiums.

The proposed regulations provide that an employee taking FMLA leave may revoke or change an existing election of group health coverage, including a health FSA under a cafeteria plan, for the remaining portion of the coverage period. The employee must be allowed to revoke an election under the same terms and conditions as participating employees who are not on FMLA leave. Also, an employee must be permitted to choose to be reinstated, on the same terms as existed prior to taking FMLA leave, in the group health plan coverage provided under a cafeteria plan or FSA upon returning from FMLA leave if the employee's coverage terminated during the leave. This is true regardless of whether the coverage terminates by revocation or by non-payment of premiums.

An employee making premium payments under a cafeteria plan or FSA who chooses to continue group health plan coverage while on FMLA leave remains responsible for the premiums he or she was paying while working. Similarly, the employer must continue to make the same contributions toward the premium as it was before the employee began FMLA leave.

A cafeteria plan or FSA may offer one or more of the following payment options to employees who choose to continue group health plan coverage while they are on unpaid leave:

(1) Pre-pay: the plan may permit, but may not require, an employee to pay the amounts due for the FMLA leave period prior to the beginning of the period;
(2) Pay-as-you-go: employees may pay their share of the premium payments on the same schedule as payments would be made if the employee were not on leave (or on any other schedule allowed by FMLA regulations); or
(3) Catch-up: the employer and the employee can agree in advance of the FMLA leave that the employee elects to continue health coverage while on unpaid FMLA leave, that the employer will pay the employee's premium during the leave, and that the amounts so advanced by the employer will be repaid by the employee when the employee returns from leave.

Of course, an employer is always free to waive, on a nondiscriminatory basis, the requirement that employees who elect to continue coverage while on FMLA leave must pay the amounts they would otherwise be required to pay.

If an employee substitutes paid leave for FMLA leave and continues group health plan coverage while on leave, the employee's share of the premiums must

Mr. Dempsey and Mr. Melody are attorneys with the Chicago law firm of Klein, Thorpe & Jenkins, Ltd.

June 1996 / Illinois Municipal Review / Page 7

be paid by the method normally used during any paid leave, such as a salary reduction agreement.

The proposed regulations also provide that a plan may not allow employees on FMLA leave to defer compensation from one cafeteria plan year to a subsequent cafeteria plan year. In other words, if an employee takes FMLA leave for the last two months of one plan year and the first month of the next, the employee can pre-pay on a pre-tax basis the payments required for the first two months. The employee must use another option to make the premium payment due for the third month.

The health FSA uniform coverage rule applies during the FMLA leave period as long as the employee continues health coverage, regardless of the payment option selected. As long as the employee continues coverage, the full amount of the elected coverage, less any prior reimbursements, must be available to the employee at all times, including the FMLA leave period.

If an employee's coverage under a health FSA terminates while the employee is on FMLA leave, the employee is not entitled to reimbursement for claims incurred during the period in which the coverage was terminated. Similarly, if the employee subsequently elects to be reinstated to the health FSA upon return from leave, the employee may not retroactively elect coverage for claims incurred during the period in which the coverage was terminated. Reinstatement is at the employee's election, and an employer may not require an employee whose coverage has terminated while the employee was on FMLA leave to reinstate coverage under a health FSA upon return from leave.

The proposed regulations note that the FMLA requirements apply only to health benefits, and therefore do not require an employer to maintain an employee's non-health benefits during FMLA leave, even if such benefits are provided pursuant to a cafeteria plan. An employee's entitlement to cafeteria plan benefits other than group health benefits during FMLA leave is to be determined by established employer policy. This rule includes an employee's right to revoke an election of non-health benefits under a cafeteria plan while on FMLA leave. However, the FMLA does require employers to allow employees to be reinstated in the cafeteria plan upon their return from FMLA leave. If it is necessary for the employer to continue non-health benefits to ensure that it can provide equivalent benefits upon the employee's reinstatement, the employer may do so and recoup any costs incurred for paying the employee's share of the premiums during the leave.

Finally, the proposed regulations note that except as otherwise provided, all of the existing rules governing cafeteria plans, including the nondiscrimination requirements, continue to apply. •

Page 8 / Illinois Municipal Review / June 1996