3511 / What are the payment options that must be made available to employees on FMLA leave?

Whatever payment options are available to employees on non-FMLA leave must also be made available to employees on FMLA leave.¹ Employers must continue to contribute the same share of the premium cost that they were paying prior to the FMLA leave. Employees who choose to continue health coverage during an FMLA leave must pay the same portion of the cost of such coverage that they paid while actively at work.² Employers may choose to waive this requirement, provided that they do so on a nondiscriminatory basis.

A cafeteria plan may generally offer employees on unpaid FMLA leave up to three options for paying for their health coverage under a cafeteria plan or health FSA.³ These rules do not apply where paid leave is substituted for unpaid FMLA leave, in which case the employer must offer the payment method normally available during other types of paid leave.⁴

Any of the three payment options discussed below may generally be made on a pre-tax salary reduction basis to the extent that the employee on FMLA leave has any taxable compensation (including the cash value of unused sick days or vacation days). A restriction applies when an employee’s FMLA leave spans two plan years. In such a case, the plan may not operate in a manner that would allow employees on FMLA leave to defer compensation from one plan year to a subsequent plan year.⁵ Any of the three payment options may also be made on an after-tax basis.

A cafeteria plan may offer one or more of the following payment options, or a combination of these options, to an employee who continues group health plan coverage (including a health FSA) while on unpaid FMLA leave; provided that the payment options for employees on FMLA leave are offered on terms at least as favorable as those offered to employees not on FMLA leave.

“Pre-pay” Option. Under this option, the employer allows the employee to pay the amounts due for the FMLA leave period prior to the commencement of FMLA leave.⁶ Under no circumstances may the pre-pay option be the only option offered to employees on FMLA leave. The employer may offer the pre-pay option to employees on FMLA leave even if such option is not offered to employees on other types of unpaid leave.⁷

“Pay-as-you-go” Option. Under this option, employees pay their portion of the health care costs according to a payment schedule. This schedule may be (1) the same as the schedule that would be in effect if they were not on FMLA leave; (2) the same schedule upon which COBRA payments would be made (see Q 368); (3) the same schedule as applies to other employees on other, unpaid non-FMLA leave; or (4) any other schedule that (a) the employee and the employer voluntarily agree upon and (b) is not inconsistent with the regulations. The employer may not offer employees on FMLA leave only the pre-pay option and the catch-up option if the pay- as-you-go option is offered to employees on unpaid non-FMLA leave.⁸

“Catch-up” Option. Under this option, an employer continues providing coverage during FMLA leave. The catch-up option may be the sole option offered by the employer only if it is the sole option offered to employees on unpaid non-FMLA leave.⁹

In general, the employer and the employee must agree in advance that (1) coverage will continue during the FMLA leave, (2) the employer assumes responsibility for the payment of employee’s portion of the health care costs during the FMLA leave, and (3) the employee will repay such amounts when he returns from FMLA leave.

Planning Point: Many states have developed their own state-level paid family and medical leave programs (PFML programs).  That raised questions over how these programs are treated for federal and employment tax purposes.  The IRS clarified that employer contributions to state PFML programs are excluded from employees' income and not subject to FICA, FUTA or federal tax withholding.  Employer contributions are treated as after-tax contributions.  However, if the employer makes the employee's required contribution on their behalf, that contribution is included in the employee's compensation and subject to FICA, FUTA and federal tax withholding.  When employees receive benefits under state PFML programs, they are treated as compensation to the extent they are designed to replace the employee's wages (unless the amounts qualify for exclusion based on the rules governing accident and health plans, meaning that they're paid for medical reasons).  Importantly, the tax treatment of benefits will vary depending on whether they are paid for family or medical reasons.¹⁰

Employer’s Right of Recoupment. An employer is not required to continue the coverage of an employee on FMLA leave who fails to make the required premium payments when due. But if the employer does continue coverage, the employer is entitled to recoup the missed payments under the “catch-up” option, without the employee’s prior agreement.¹¹

Health FSAs. Health FSAs are generally subject to the same payment rules as traditional cafeteria plans.¹² The regulations do not make clear whether the employer’s right of recoupment, discussed above, applies to health FSAs. If so, it would appear to represent a significant departure from the general risk-shifting rule applicable to health FSAs.