The health FSA uniform coverage rule.
A health FSA must make the employee’s full annual election available from day one. That rule shapes how you handle reimbursements, terminations and leaves, and it surprises many employers.
What the rule says.
Full Election From Day One
The IRS says the maximum amount of reimbursement from a health FSA must be available at all times during the coverage period. The employee’s entire election can be used from the first day of the plan year for qualifying expenses incurred during the coverage period. For a quick estimate, use our free FSA tax savings calculator.
Contributions To Date Do Not Limit Claims
A plan may not base reimbursements on what the employee has contributed up to a given date. Reimbursements are only reduced for amounts already paid out for the same period. In a health flexible spending account, the full annual election is generally available from the first day of the plan year. An employee early in the year can claim well beyond what has been withheld so far.
No Recoupment At Termination
The IRS has said that if an employee has been reimbursed more than he or she contributed by the time of a layoff or termination, the employer cannot recoup the difference from the employee. That is part of how the uniform coverage rule shifts risk to the employer. Employers should talk to their tax adviser or counsel before treating any unpaid balance as recoverable.
Carryover Does Not Change It
The IRS has said the uniform coverage rule continues to apply when a plan adopts a carryover of unused amounts. A carryover adds another layer to the administration, but it does not remove the requirement that the full election be available. Check how your plan document and administrator treat carryover amounts and the claims that use them.
What plan sponsors can do.
Plan For The Risk
Because of the rule, the plan can pay out more than an employee has funded. Weigh this when you set election limits and decide on any carryover. Think about how many employees might leave early in the year, and how large the elections are. Some employers choose to cap elections to limit exposure. Your tax adviser or counsel can help you weigh the tradeoffs.
Do Not Pursue Payroll Recoveries
Do not try to claw back an FSA overpayment from final wages without checking with your advisor first. Payroll rules, state wage laws, and the plan document may all affect what is allowed. Ask your tax adviser or counsel before any deduction, and keep a record of what was paid and what was claimed.
Handle Leaves With The Rules
For employees on FMLA leave, the regulations address how coverage may be reinstated and prorated. Review the leave policy with the plan document. Leave timing can change how contributions and claims are handled, depending on the employee’s choices and the plan terms. Write down the approach in your leave policy and confirm it with your administrator and counsel.
Keep The Plan Document Aligned
Make sure the document describes the coverage period and how reimbursements are paid. Have your administrator and counsel compare the plan document with how claims are actually paid. Differences between the written terms and daily practice are a common source of problems in an audit or dispute.
Three questions to settle.
Does Our Administrator Pay The Full Election
Confirm claims are paid up to the full election, less prior reimbursements. Ask your administrator to describe in writing how a claim is processed when the account balance is lower than the claim. A short example using real numbers from your plan is often enough to confirm the process.
What Happens On Termination
Confirm how claims after termination are handled and whether COBRA applies to the health FSA. Ask about the run-out period for claims, how final balances are handled, and how employees are notified. COBRA treatment of the health FSA depends on plan facts, so confirm the answer with your administrator or counsel.
Does The Rule Apply To Our HRA
The IRS has said it does not apply to an HRA, which is paid for solely by the employer. Check the plan type. An HRA works differently from an employee-funded account, so its own rules and plan terms control. If your arrangement mixes employer and employee money, ask your tax adviser or counsel which rules apply.
Common Questions About Uniform Coverage
Does the rule apply to dependent care accounts?
No. The proposed regulations say it does not apply to dependent care assistance or adoption assistance accounts.
Can we recover an overpayment when someone leaves?
The IRS has said the employer cannot recoup the difference from the employee when reimbursements exceeded contributions at termination.
Does it apply to an HRA?
No. The IRS has said it does not apply to an HRA that is funded solely by the employer.
Is it a final regulation?
The cited rule comes from proposed regulations and IRS guidance that plans rely on. Check current status with counsel.
Does a carryover change the rule?
No. The IRS has said it still applies when a plan adopts a carryover.
Is this legal advice?
No. For your plan, involve your counsel or tax advisor. We can help you organize your plan document and questions.
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Laws and rules referenced
26 U.S.C. § 125 — Cafeteria plans: pre-tax premium payments, plan limits and nondiscrimination rules.
IRS Notice 2013-71 — Health FSA carryover of unused amounts.
IRS Notice 2005-42 — The grace period for cafeteria plan health and dependent care FSAs.
This page is general information, not legal or tax advice. Rules change and facts matter, so confirm your situation with counsel or a qualified advisor.
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