Q&A: Administrators: Employer Issues
Question: What is the "Annualization Rule" for Medical FSA? How Does it Work?
Answer:
The Medical FSA is deemed a health plan by federal law. It must demonstrate the risk-shifting characteristics of insurance and is subject to many of the same laws as health insurance, notably including COBRA.
Since 1989, when IRS clarified its regulations applicable to flex plans, a uniform coverage provision ("annualization rule") has applied.
Simply stated, this provision requires an employer to reimburse a participant's incurred Medical FSA claims up to the full annualized election amount at any time during the plan year, even if such reimbursements exceed the participant's year-to-date FSA contribution.
Example: Joe elects to contribute $100/month to his Medical FSA for the 12-month calendar year. In February, Joe submits a legitimate $800 claim for dental work. The expense must be fully reimbursed, even though Joe's contributions to date total only $100.
An employer may legally limit liability under the annualization provision by:
- Setting a limit on the annual Medical FSA maximum.
- Setting a waiting period for Medical FSA eligibility that may exceed the waiting period for other benefits.
An employer may not limit liability by:
- Limiting reimbursements to amounts contributed year-to-date.
- Recovering excess payments in event of employee termination.
This publication is designed to provide accurate and authoritative information regarding the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought.
Some portions of an answer may reflect the specific administrative practices of our firm, and may not be universally applicable to all flexible benefit plans.
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