[Federal Register Volume 66, Number 201 (Wednesday, October 17, 2001)]
[Rules and Regulations]
[Pages 52675-52680]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-25909]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 8966]
RIN 1545-AT47


Effect of the Family and Medical Leave Act on the Operation of 
Cafeteria Plans

AGENCY: Internal Revenue Service (IRS), Treasury.

[[Page 52676]]


ACTION: Final regulations.

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SUMMARY: This document contains final regulations relating to cafeteria 
plans that reflect changes made by the Family and Medical Leave Act of 
1993 (Act). The final regulations provide the public with guidance 
needed to comply with the Act and affect employees who participate in 
cafeteria plans.

DATES: Effective Date: These regulations are effective October 17, 
2001.
    Applicability Date: These regulations are applicable for cafeteria 
plan years beginning on or after January 1, 2002.

FOR FURTHER INFORMATION CONTACT: Shoshanna Chaiton at (202) 622-6080 
(not a toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains additions to the Income Tax Regulations (26 
CFR part 1) under section 125 of the Internal Revenue Code of 1986 
(Code). These additions conform the cafeteria plan regulations to the 
Family and Medical Leave Act of 1993 (FMLA), Public Law 103-3, 29 
U.S.C. 2601 et seq. FMLA imposes certain requirements on employers 
regarding coverage, including family coverage, under group health plans 
for employees taking FMLA leave and regarding the restoration of 
benefits to employees who return from FMLA leave. Proposed regulations, 
EE-20-95, published in the Federal Register on December 21, 1995 (60 FR 
66229), addressed a number of the principal questions that were raised 
about how these FMLA requirements affect the operation of cafeteria 
plans (including flexible spending arrangements) maintained under 
section 125. These final regulations are based on the 1995 proposed 
regulations, and include clarifications and other changes resulting 
from comments received on the proposed regulations.

Summary of Changes

    A number of comments that were made in response to the 1995 
proposed regulations relate to FMLA. The requirements pertaining to 
FMLA leave, including the employer's obligation to maintain coverage 
under a group health plan during FMLA leave and to restore benefits 
upon return from FMLA leave, are established by FMLA, not the Code. The 
U.S. Department of Labor, in 29 CFR part 825, has published rules 
interpreting the requirements of FMLA, and the Department of Labor has 
jurisdiction relating to those rights or obligations. These final 
regulations do not interpret FMLA or the rules published by the 
Department of Labor. Rather, they provide guidance on the cafeteria 
plan rules that apply to an employee in circumstances to which FMLA and 
the Labor Regulations thereunder also apply. Accordingly, these final 
regulations include a number of changes intended to clarify which 
particular conditions must be satisfied to comply with FMLA and with 
the cafeteria plan rules.
    The Department of the Treasury, including the Internal Revenue 
Service (IRS), discussed these final regulations with the Department of 
Labor to ensure that they do not conflict with, and are not 
inconsistent with, the provisions of FMLA or the Labor regulations 
thereunder, at 29 CFR part 825. In response to those discussions and 
comments made by the public, these cafeteria plan regulations have been 
changed to clarify the circumstances under which an employer is 
required to maintain coverage and an employee is required to continue 
paying premiums. These changes are described below.
    As a general matter, under FMLA, an employer has the obligation to 
offer coverage under any group health plan for the duration of FMLA 
leave, whether paid or unpaid, and under the same conditions as 
coverage would have been provided if the employee had been continuously 
working during the entire leave period. The employee has the right to 
keep this coverage by continuing to pay the premium. During the period 
of FMLA leave, the employer is required to continue payment of its 
share of the costs of group health insurance coverage, but may 
condition such continued payments on the employee paying his or her 
share of the costs under one of the methods set forth at 29 CFR 
825.210. See also the notice requirements at 29 CFR 825.301(b)(1)(iv).
    Furthermore, the employer must either allow the employee to revoke 
coverage while on unpaid FMLA leave, or continue coverage but allow the 
employee to discontinue his or her share of the premium payments while 
the employee is on unpaid leave. Although ordinarily health plan 
coverage would cease if an employee does not make his or her share of 
the premium payments, FMLA does not give the employee a right to 
require that the employer terminate coverage. The FMLA permits an 
employer to continue health plan coverage while the employee is on 
unpaid FMLA leave by paying both the employer's and the employee's 
share of group health plan contributions. In this event, the employer 
may recover the employee's share of the contributions when the employee 
returns from leave or, if the employee fails to return from leave, the 
employer may recover the employee's share of contributions and may also 
recover its own share as well under the circumstances set forth in 29 
CFR 825.213(a). However, under the FMLA, an employee who chooses to 
discontinue premium payments may not be required to make contributions 
until the unpaid FMLA leave ends.
    Upon return from leave, FMLA requires that the employee have the 
right to be reinstated under the same terms as if the employee had 
worked during the entire leave period without any break in coverage. An 
employee who has revoked coverage or has failed to make required 
payments therefore has the right to be reinstated in the group health 
plan upon return from leave. If the employee does not elect to be 
reinstated in the group health plan upon return from FMLA leave, the 
employer may nevertheless require the employee to resume participation 
if the employer also requires employees who return from unpaid non-FMLA 
leave to resume participation upon return from leave. This reflects a 
change in position from the 1995 proposed regulations, which 
specifically prohibited an employer from requiring an employee whose 
coverage has terminated while on FMLA leave to reinstate coverage under 
a health FSA upon return from FMLA leave. Several commentators 
disagreed with this position, and suggested that the FMLA regulations 
do not require this rule. In response to these comments, the rule has 
been modified as described above.
    One commentator questioned whether an employee on paid FMLA leave 
may change or revoke an election. Whether an employer is required to 
permit an employee on paid FMLA leave to revoke an election is governed 
by the FMLA and the Labor Regulations thereunder, rather than these 
regulations. As described above, the FMLA permits an employer to 
require that the employee continue coverage during an FMLA leave if the 
employer is continuing the employee's pay during the FMLA leave and 
does not treat employees on paid FMLA leave differently from other 
employees on paid leave. If these two conditions are satisfied, as 
described in Q&A-4, an employer may require that an employee who goes 
on paid FMLA leave continue to pay premiums by the method normally used 
during any paid leave.
    In response to comments, the rule in the 1995 regulations 
concerning the catch-up payment option was modified. Under the 1995 
regulations, an employee who elected to use the catch-up payment option 
before going on FMLA leave was required to enter into

[[Page 52677]]

an advance agreement with the employer specifying that the employee 
wanted to continue health coverage while on unpaid FMLA leave, that the 
employer would pay the premiums during the FMLA leave, and that the 
employee would repay these amounts upon return. Commentators noted that 
this rule did not provide enough flexibility for employers attempting 
to recoup payments in situations where employees originally elected the 
pay-as-you-go method but then were not able to make those required 
payments. Accordingly, the rule under the final regulations eliminates 
the requirement that an employee who elects the catch-up payment option 
enter into an advance agreement with the employer. The new rule adds 
flexibility and permits continued coverage because, although employees 
may still use either the catch-up payment option or the after-tax pay-
as-you-go method from the outset, now employers may continue coverage 
and, under the catch-up payment option, recoup any amounts paid on an 
employee's behalf if the employee cannot make all the payments under 
the pay-as-you-go method.
    The 1995 proposed regulations included a special proration rule for 
cases in which health coverage under a flexible spending arrangement 
(FSA) did not continue during an FMLA leave because the employee 
revoked coverage or failed to make required payments, and then the 
employee elects to resume the coverage when the leave ends during the 
same year. The proposed regulation permitted the employee's coverage to 
be reduced after the employee resumes work if the employee did not have 
coverage during the FMLA leave. Based on information provided by the 
Department of Labor concerning FMLA, the final regulations require 
that, where an employee does not have coverage under the FSA during 
FMLA leave because the employee chooses to revoke coverage or does not 
pay required premiums for any reason during FMLA leave, the employer 
must provide the employee upon return from FMLA leave a choice between: 
(1) Resuming coverage at the original level and making up the unpaid 
premium payments or (2) resuming coverage at a level that is reduced 
under the proration rule and resuming premium payments at the original 
level. Where the employee selects the prorated method and the plan has 
already made disbursements to the employee that exceed the premiums 
that will be paid for the year, the employer may not require the 
employee to pay any more than the remaining premiums due. If health FSA 
coverage does continue during the leave (whether due to an FMLA 
coverage continuation election by the employee or because the 
employer's plan requires health FSA coverage to be continued during a 
leave), there would of course be no proration.
    Commentators requested clarification regarding whether employers 
are required to obtain elections from employees who are on FMLA leave 
when an open enrollment period occurs. In response to this comment, the 
final regulations clarify that employees on FMLA leave have the same 
rights during the leave period as employees participating in a 
cafeteria plan who are not on FMLA leave. Accordingly, employers are 
required to give employees on FMLA leave the right to enroll in a plan 
or change their election while they are on leave in the same manner as 
for active employees, rather than waiting for the employees on FMLA 
leave to return to work.
    These final regulations supplement the regulations that were issued 
at Sec. 1.125-4 (TD 8878 issued in March of 2000 (65 FR 15548) and TD 
8921 (issued in January of 2001 (66 FR 1837)) setting forth the 
conditions under which a cafeteria plan can permit an employee to make 
an election change during the year. Thus, as provided at Sec. 1.125-
4(g), if an employee goes on an FMLA leave, section 125 allows a 
cafeteria plan to permit the employee to make an election change if the 
conditions in either these final regulations or the regulations at 
Sec. 1.125-4 are satisfied. Further, as described above, FMLA requires 
that an employee who goes on an FMLA leave have the same election 
rights under a group health plan as an employee who is not on FMLA 
leave. Thus, a cafeteria plan that is subject to FMLA must allow an 
employee who goes on an FMLA leave to be able to make the same election 
changes as an employee who is not on an FMLA leave.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) and the Regulatory Flexibility Act (5 U.S.C. chapter 
6) do not apply to these regulations, and, therefore, a Regulatory 
Flexibility Analysis is not required. Pursuant to section 7805(f) of 
the Code, these regulations will be submitted to the Chief Counsel for 
Advocacy of the Small Business Administration for comment on its impact 
on small business.

Drafting Information

    The principal author of these regulations is Christine Keller, 
Division Counsel/Associate Chief Counsel (Office of Tax Exempt and 
Government Entities). However, other personnel from the IRS and 
Department of the Treasury participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Adoption of Amendments to the Regulations

    Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

    Paragraph 1. The authority for part 1 continues to read in part as 
follows:

    Authority: 26 U.S.C. 7805 * * *

    Par. 2. Section 1.125-3 is added to read as follows:


Sec. 1.125-3  Effect of the Family and Medical Leave Act (FMLA) on the 
operation of cafeteria plans.

    The following questions and answers provide guidance on the effect 
of the Family and Medical Leave Act (FMLA) on the operation of 
cafeteria plans:
    Q-1: May an employee revoke coverage or cease payment of his or her 
share of group health plan premiums when taking unpaid Family and 
Medical Leave Act (FMLA), 29 U.S.C. 2601 et seq., leave?
    A-1: Yes. An employer must either allow an employee on unpaid FMLA 
leave to revoke coverage, or continue coverage but allow the employee 
to discontinue payment of his or her share of the premium for group 
health plan coverage (including a health flexible spending arrangement 
(FSA)) under a cafeteria plan for the period of the FMLA leave. See 29 
CFR 825.209(e). FMLA does not require that an employer allow an 
employee to revoke coverage if the employer pays the employee's share 
of premiums. As discussed in Q&A-3, if the employer continues coverage 
during an FMLA leave, the employer may recover the employee's share of 
the premiums when the employee returns to work. FMLA also provides the 
employee a right to be reinstated in the group health plan coverage 
(including a health FSA) provided under a cafeteria plan upon returning 
from FMLA leave if the employee's group health plan coverage terminated 
while on FMLA leave (either

[[Page 52678]]

by revocation or due to nonpayment of premiums). Such an employee is 
entitled, to the extent required under FMLA, to be reinstated on the 
same terms as prior to taking FMLA leave (including family or dependent 
coverage), subject to any changes in benefit levels that may have taken 
place during the period of FMLA leave as provided in 29 CFR 
825.215(d)(1). See 29 CFR 825.209(e) and 825.215(d). In addition, such 
an employee has the right to revoke or change elections under 
Sec. 1.125-4 (e.g., because of changes in status or cost or coverage 
changes as provided under Sec. 1.125-4) under the same terms and 
conditions as are available to employees participating in the cafeteria 
plan who are working and not on FMLA leave.
    Q-2: Who is responsible for making premium payments under a 
cafeteria plan when an employee on FMLA leave continues group health 
plan coverage?
    A-2: FMLA provides that an employee is entitled to continue group 
health plan coverage during FMLA leave whether or not that coverage is 
provided under a health FSA or other component of a cafeteria plan. See 
29 CFR 825.209(b). FMLA permits an employer to require an employee who 
chooses to continue group health plan coverage while on FMLA leave to 
be responsible for the share of group health premiums that would be 
allocable to the employee if the employee were working, and, for this 
purpose, treats amounts paid pursuant to a pre-tax salary reduction 
agreement as amounts allocable to the employee. However, FMLA requires 
the employer to continue to contribute the share of the cost of the 
employee's coverage that the employer was paying before the employee 
commenced FMLA leave. See 29 CFR 825.100(b) and 825.210(a).
    Q-3: What payment options are required or permitted to be offered 
under a cafeteria plan to an employee who continues group health plan 
coverage while on unpaid FMLA leave, and what is the tax treatment of 
these payments?
    A-3: (a) In general. Subject to the limitations described in 
paragraph (b) of this Q&A-3, 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. These options are 
referred to in this section as pre-pay, pay-as-you-go, and catch-up. 
See also the FMLA notice requirements at 29 CFR 825.301(b)(1)(iv).
    (1) Pre-pay. (i) Under the pre-pay option, a cafeteria plan may 
permit an employee to pay, prior to commencement of the FMLA leave 
period, the amounts due for the FMLA leave period. However, FMLA 
provides that the employer may not mandate that an employee pre-pay the 
amounts due for the leave period. See 29 CFR 825.210(c)(3) and (4).
    (ii) Contributions under the pre-pay option may be made on a pre-
tax salary reduction basis from any taxable compensation (including 
from unused sick days or vacation days). However, see Q&A-5 of this 
section regarding additional restrictions on pre-tax salary reduction 
contributions when an employee's FMLA leave spans two cafeteria plan 
years.
    (iii) Contributions under the pre-pay option may also be made on an 
after-tax basis.
    (2) Pay-as-you-go. (i) Under the pay-as-you-go option, employees 
may pay their share of the premium payments on the same schedule as 
payments would have been made if the employee were not on leave or 
under any other payment schedule permitted by the Labor Regulations at 
29 CFR 825.210(c) (e.g., on the same schedule as payments are made 
under section 4980B (relating to coverage under the Consolidated 
Omnibus Budget Reconciliation Act (COBRA), 26 U.S.C. 4980B), under the 
employer's existing rules for payment by employees on leave without 
pay, or under any other system voluntarily agreed to between the 
employer and the employee that is not inconsistent with this section or 
with 29 CFR 825.210(c)).
    (ii) Contributions under the pay-as-you-go option are generally 
made by the employee on an after-tax basis. However, contributions may 
be made on a pre-tax basis to the extent that the contributions are 
made from taxable compensation (e.g., from unused sick days or vacation 
days) that is due the employee during the leave period.
    (iii) An employer is not required to continue the group health 
coverage of an employee who fails to make required premium payments 
while on FMLA leave, provided that the employer follows the notice 
procedures required under FMLA. See 29 CFR 825.212. However, if the 
employer chooses to continue the health coverage of an employee who 
fails to pay his or her share of the premium payments while on FMLA 
leave, FMLA permits the employer to recoup the premiums (to the extent 
of the employee's share). See 29 CFR 825.212(b). Such recoupment may be 
made as set forth in paragraphs (a)(3)(i) and (ii) of this Q&A-3. See 
also Q&A-6 of this section regarding coverage under a health FSA when 
an employee fails to make the required premium payments while on FMLA 
leave.
    (3) Catch-up. (i) Under the catch-up option, the employer and the 
employee may agree in advance that the group coverage will continue 
during the period of unpaid FMLA leave, and that the employee will not 
pay premiums until the employee returns from the FMLA leave. Where an 
employee is electing to use the catch-up option, the employer and the 
employee must agree in advance of the coverage period that: the 
employee elects to continue health coverage while on unpaid FMLA leave; 
the employer assumes responsibility for advancing payment of the 
premiums on the employee's behalf during the FMLA leave; and these 
advance amounts are to be paid by the employee when the employee 
returns from FMLA leave.
    (ii) When an employee fails to make required premium payments while 
on FMLA leave, an employer is permitted to utilize the catch-up option 
to recoup the employee's share of premium payments when the employee 
returns from FMLA leave. See, e.g., 29 CFR 825.212(b). If the employer 
chooses to continue group coverage under these circumstances, the prior 
agreement of the employee, as set forth in paragraph (a)(3)(i) of this 
Q&A-3, is not required.
    (iii) Contributions under the catch-up option may be made on a pre-
tax salary reduction basis from any available taxable compensation 
(including from unused sick days and vacation days) after the employee 
returns from FMLA leave. The cafeteria plan may provide for the catch-
up option to apply on a pre-tax salary reduction basis if premiums have 
not been paid on any other basis (i.e., have not been paid under the 
pre-pay or pay-as-you-go options or on a catch-up after-tax basis).
    (iv) Contributions under the catch-up option may also be made on an 
after-tax basis.
    (b) Exceptions. Whatever payment options are offered to employees 
on non-FMLA leave must be offered to employees on FMLA leave. In 
accordance with 29 CFR 825.210(c), cafeteria plans may offer one or 
more of the payment options described in paragraph (a) of this Q&A-3, 
with the following exceptions:
    (1) FMLA does not permit the pre-pay option to be the sole option 
offered to employees on FMLA leave. However, the cafeteria plan may 
include pre-payment as an option for employees on FMLA leave, even if 
such option is not

[[Page 52679]]

offered to employees on non-FMLA leave-without-pay.
    (2) FMLA allows the catch-up option to be the sole option offered 
to employees on FMLA leave if and only if the catch-up option is the 
sole option offered to employees on non-FMLA leave-without-pay.
    (3) If the pay-as-you-go option is offered to employees on non-FMLA 
leave-without-pay, the option must also be offered to employees on FMLA 
leave. The employer may also offer employees on FMLA leave the pre-pay 
option and/or the catch-up option.
    (c) Voluntary waiver of employee payments. In addition to the 
foregoing payment options, an employer may voluntarily waive, on a 
nondiscriminatory basis, the requirement that employees who elect to 
continue group health coverage while on FMLA leave pay the amounts the 
employees would otherwise be required to pay for the leave period.
    (d) Example. The following example illustrates this Q&A-3:

    Example. (i) Employer Y allows employees to pay premiums for 
group health coverage during an FMLA leave on an after-tax basis 
while the employee is on unpaid FMLA leave. Under the terms of Y's 
cafeteria plan, if an employee elects to continue health coverage 
during an unpaid FMLA leave and fails to pay one or more of the 
after-tax premium payments due for that coverage, the employee's 
salary after the employee returns from FMLA leave is reduced to 
cover unpaid premiums (i.e. the premiums that were to be paid by the 
employee on an after-tax basis during the FMLA leave, but were paid 
by the employer instead).
    (ii) In this Example, Y's cafeteria plan satisfies the 
conditions in this Q&A-3. Y's cafeteria plan would also satisfy the 
conditions in this Q&A-3 if the plan provided for coverage to cease 
in the event the employee fails to make a premium payment when due 
during an unpaid FMLA leave.

    Q-4: Do the special FMLA requirements concerning payment of 
premiums by an employee who continues group health plan coverage under 
a cafeteria plan apply if the employee is on paid FMLA leave?
    A-4: No. The Labor Regulations provide that, if an employee's FMLA 
leave is paid leave as described at 29 CFR 825.207 and the employer 
mandates that the employee continue group health plan coverage while on 
FMLA leave, the employee's share of the premiums must be paid by the 
method normally used during any paid leave (e.g., by pre-tax salary 
reduction if the employee's share of premiums were paid by pre-tax 
salary reduction before the FMLA leave began). See 29 CFR 825.210(b).
    Q-5: What restrictions apply to contributions when an employee's 
FMLA leave spans two cafeteria plan years?
    A-5: (a) No amount will be included in an employee's gross income 
due to participation in a cafeteria plan during FMLA leave, provided 
that the plan complies with other generally applicable cafeteria plan 
requirements. Among other requirements, a plan may not operate in a 
manner that enables employees on FMLA leave to defer compensation from 
one cafeteria plan year to a subsequent cafeteria plan year. See 
section 125(d)(2).
    (b) The following example illustrates this Q&A-5:

    Example. (i) Employee A elects group health coverage under a 
calendar year cafeteria plan maintained by Employer X. Employee A's 
premium for health coverage is $100 per month throughout the 12-
month period of coverage. Employee A takes FMLA leave for 12 weeks 
beginning on October 31 after making 10 months of premium payments 
totaling $1,000 (10 months  x  $100 = $1,000). Employee A elects to 
continue health coverage while on FMLA leave and utilizes the pre-
pay option by applying his or her unused sick days in order to make 
the required premium payments due while he or she is on FMLA leave.
    (ii) Because A cannot defer compensation from one plan year to a 
subsequent plan year, A may pre-pay the premiums due in November and 
December (i.e., $100 per month) on a pre-tax basis, but A cannot 
pre-pay the premium payment due in January on a pre-tax basis. If A 
participates in the cafeteria plan in the subsequent plan year, A 
must either pre-pay for January on an after-tax basis or use another 
option (e.g., pay-as-you-go, catch-up, reduction in unused sick 
days, etc.) to make the premium payment due in January.

    Q-6: Are there special rules concerning employees taking FMLA leave 
who participate in health FSAs offered under a cafeteria plan?
    A-6: (a) In general. (1) A group health plan that is a flexible 
spending arrangement (FSA) offered under a cafeteria plan must conform 
to the generally applicable rules in this section concerning employees 
who take FMLA leave. Thus, to the extent required by FMLA (see 29 CFR 
825.209(b)), an employer must--
    (i) Permit an employee taking FMLA leave to continue coverage under 
a health FSA while on FMLA leave; and
    (ii) If an employee is on unpaid FMLA leave, either--
    (A) Allow the employee to revoke coverage; or
    (B) Continue coverage, but allow the employee to discontinue 
payment of his or her share of the premium for the health FSA under the 
cafeteria plan during the unpaid FMLA leave period.
    (2) Under FMLA, the plan must permit the employee to be reinstated 
in health coverage upon return from FMLA leave on the same terms as if 
the employee had been working throughout the leave period, without a 
break in coverage. See 29 CFR 825.214(a) and 825.215(d)(1) and 
paragraph (b)(2) of this Q&A-6. In addition, under FMLA, a plan may 
require an employee to be reinstated in health coverage upon return 
from a period of unpaid FMLA leave, provided that employees who return 
from a period of unpaid leave not covered by the FMLA are also required 
to resume participation upon return from leave.
    (b) Coverage. (1) Regardless of the payment option selected under 
Q&A-3 of this section, for so long as the employee continues health FSA 
coverage (or for so long as the employer continues the health FSA 
coverage of an employee who fails to make the required contributions as 
described in Q&A-3(a)(2)(iii) of this section), the full amount of the 
elected health FSA coverage, less any prior reimbursements, must be 
available to the employee at all times, including the FMLA leave 
period.
    (2) (i) If an employee's coverage under the health FSA terminates 
while the employee is on FMLA leave, the employee is not entitled to 
receive reimbursements for claims incurred during the period when the 
coverage is terminated. If an employee subsequently elects or the 
employer requires the employee to be reinstated in the health FSA upon 
return from FMLA leave for the remainder of the plan year, the employee 
may not retroactively elect health FSA coverage for claims incurred 
during the period when the coverage was terminated. Upon reinstatement 
into a health FSA upon return from FMLA leave (either because the 
employee elects reinstatement or because the employer requires 
reinstatement), the employee has the right under FMLA: to resume 
coverage at the level in effect before the FMLA leave and make up the 
unpaid premium payments, or to resume coverage at a level that is 
reduced and resume premium payments at the level in effect before the 
FMLA leave. If an employee chooses to resume health FSA coverage at a 
level that is reduced, the coverage is prorated for the period during 
the FMLA leave for which no premiums were paid. In both cases, the 
coverage level is reduced by prior reimbursements.
    (ii) FMLA requires that an employee on FMLA leave have the right to 
revoke or change elections (because of events described in Sec. 1.125-
4) under the same

[[Page 52680]]

terms and conditions that apply to employees participating in the 
cafeteria plan who are not on FMLA leave. Thus, for example, if a group 
health plan offers an annual open enrollment period to active 
employees, then, under FMLA, an employee on FMLA leave when the open 
enrollment is offered must be offered the right to make election 
changes on the same basis as other employees. Similarly, if a group 
health plan decides to offer a new benefit package option and allows 
active employees to elect the new option, then, under FMLA, an employee 
on FMLA leave must be allowed to elect the new option on the same basis 
as other employees.
    (3) The following examples illustrate the rules in this Q&A-6:

    Example 1. (i) Employee B elects $1,200 worth of coverage under 
a calendar year health FSA provided under a cafeteria plan, with an 
annual premium of $1,200. Employee B is permitted to pay the $1,200 
through pre-tax salary reduction amounts of $100 per month 
throughout the 12-month period of coverage. Employee B incurs no 
medical expenses prior to April 1. On April 1, B takes FMLA leave 
after making three months of contributions totaling $300 (3 months 
x  $100 = $300). Employee B's coverage ceases during the FMLA leave. 
Consequently, B makes no premium payments for the months of April, 
May, and June, and B is not entitled to submit claims or receive 
reimbursements for expenses incurred during this period. Employee B 
returns from FMLA leave and elects to be reinstated in the health 
FSA on July 1.
    (ii) Employee B must be given a choice of resuming coverage at 
the level in effect before the FMLA leave (i.e., $1,200) and making 
up the unpaid premium payments ($300), or resuming health FSA 
coverage at a level that is reduced on a prorata basis for the 
period during the FMLA leave for which no premiums were paid (i.e., 
reduced for 3 months or 1/4 of the plan year) less prior 
reimbursements (i.e., $0) with premium payments due in the same 
monthly amount payable before the leave (i.e., $100 per month). 
Consequently, if B chooses to resume coverage at the level in effect 
before the FMLA leave, B's coverage for the remainder of the plan 
year would equal $1,200 and B's monthly premiums would be increased 
to $150 per month for the remainder of the plan year, to make up the 
$300 in premiums missed ($100 per month plus $50 per month ($300 
divided by the remaining 6 months)). If B chooses prorated coverage, 
B's coverage for the remainder of the plan year would equal $900, 
and B would resume making premium payments of $100 per month for the 
remainder of the plan year.
    Example 2. (i) Assume the same facts as Example 1 except that B 
incurred medical expenses totaling $200 in February and obtained 
reimbursement of these expenses.
    (ii) The results are the same as in Example 1, except that if B 
chooses to resume coverage at the level in effect before the FMLA 
leave, B's coverage for the remainder of the year would equal $1,000 
($1,200 reduced by $200) and the monthly payments for the remainder 
of the year would still equal $150. If instead B chooses prorated 
coverage, B's coverage for the remainder of the plan year would 
equal $700 ($1,200 prorated for 3 months, and then reduced by $200) 
and the monthly payments for the remainder of the year would still 
equal $100.
    Example 3. (i) Assume the same facts as Example 1 except that, 
prior to taking FMLA leave, B elects to continue health FSA coverage 
during the FMLA leave. The plan permits B (and B elects) to use the 
catch-up payment option described in Q&A-3 of this section, and as 
further permitted under the plan, B chooses to repay the $300 in 
missed payments on a ratable basis over the remaining 6-month period 
of coverage (i.e., $50 per month).
    (ii) Thus, B's monthly premium payments for the remainder of the 
plan year will be $150 ($100 + $50).
    Q-7: Are employees entitled to non-health benefits while taking 
FMLA leave?
    A-7: FMLA does not require an employer to maintain an employee's 
non-health benefits (e.g., life insurance) during FMLA leave. An 
employee's entitlement to benefits other than group health benefits 
under a cafeteria plan during a period of FMLA leave is to be 
determined by the employer's established policy for providing such 
benefits when the employee is on non-FMLA leave (paid or unpaid). See 
29 CFR 825.209(h). Therefore, an employee who takes FMLA leave is 
entitled to revoke an election of non-health benefits under a cafeteria 
plan to the same extent as employees taking non-FMLA leave are 
permitted to revoke elections of non-health benefits under a cafeteria 
plan. For example, election changes are permitted due to changes of 
status or upon enrollment for a new plan year. See Sec. 1.125-4. 
However, FMLA provides that, in certain cases, an employer may continue 
an employee's non-health benefits under the employer's cafeteria plan 
while the employee is on FMLA leave in order to ensure that the 
employer can meet its responsibility to provide equivalent benefits to 
the employee upon return from unpaid FMLA. If the employer continues an 
employee's non-health benefits during FMLA leave, the employer is 
entitled to recoup the costs incurred for paying the employee's share 
of the premiums during the FMLA leave period. See 29 CFR 825.213(b). 
Such recoupment may be on a pre-tax basis. A cafeteria plan must, as 
required by FMLA, permit an employee whose coverage terminated while on 
FMLA leave (either by revocation or nonpayment of premiums) to be 
reinstated in the cafeteria plan on return from FMLA leave. See 29 CFR 
825.214(a) and 825.215(d).
    Q-8: What is the applicability date of the regulations in this 
section?
    A-8: This section is applicable for cafeteria plan years beginning 
on or after January 1, 2002.

    Par. 3. Section 1.125-4 is amended by adding a sentence at the end 
of paragraph (g) to read as follows:


Sec. 1.125-4  Permitted election changes.

* * * * *
    (g) Special requirements relating to the Family and Medical Leave 
Act. * * * See Sec. 1.125-3 for additional rules.
* * * * *

David A. Mader,
Acting Deputy Commissioner of Internal Revenue.
    Approved: October 9, 2001.
Mark Weinberger,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 01-25909 Filed 10-16-01; 8:45 am]
BILLING CODE 4830-01-P