Collecting health premiums during unpaid FMLA
Benefits & Compensation Regulatory Alert
Employees taking leave under the Family and Medical Leave Act (FMLA) are supposed to stay on your group health plan, but to do so, they must continue paying their share of the health insurance premiums.
When an employee’s FMLA leave is paid, collecting the employee’s share is fairly simple. For example, the employer may simply deduct the employee’s share from paid time off such as vacation.
But how does an employee pay his or her share of the premiums when leave is unpaid?
During unpaid FMLA, you may offer up to three payment options:
Note that you may allow a combination of these options, such as pre-pay for part of the leave and catch-up for the rest of the leave.
When future unpaid FMLA leave is foreseeable, you may allow an employee to pre-pay any premiums. For example, if an employee is adopting a child and requests several weeks for bonding leave, but does not have enough vacation to cover the absence, you could allow the employee to pre-pay his or her premiums for the portion of the leave that would be unpaid.
Note that you may not require an employee to pre-pay, so this cannot be the only one of the three options you offer. If an employee chooses this option, however, you may collect premiums on a pre-tax basis – with one exception. If the absence will extend into the next tax year (such as leave from December through January), only the premiums for the current tax year may be pre-paid with pre-tax income. The IRS does not allow employees to defer untaxed income from one year to the next.
In this example, the premiums for January could either be pre-paid with after-tax income, or the employee could elect one of the other options (pay-as-you-go, or catch-up).
Under the pay-as-you-go option, employees pay their share of the premiums using whatever agreement you and the employee create. These payments are usually made on an after-tax basis. For example, the employee might mail in a personal check every two weeks.
If the employee fails to send in the checks, or otherwise fails to make payments using your agreed-upon system, the FMLA does allow you to drop coverage after giving specified notices of non-payment. Dropping coverage would likely cause some administrative headaches, and some insurers may refuse to do it because the employee would have to be reinstated on in the health plan upon return from FMLA.
Therefore, you may prefer to continue coverage by paying the employee’s share of the premiums, then using the catch-up option once the employee returns to work. Some insurance carriers recommend this as an alternative to dropping coverage.
Under the catch-up option, you and the employee agree that the employee will not pay premiums until he or she returns from leave. This option might be used when the need for FMLA leave was not foreseeable, such as having to care for a parent who was unexpectedly hospitalized.
To use this option, you and the employee must agree in advance that:
The employee elects to continue health coverage while on leave;
The employer will pay the employee’s share of premiums during the leave; and
The employee will repay those amounts when he or she returns.
Essentially, when the employee returns, you collect the current premiums plus any catch-up payments, such as taking double premiums until the employee is caught up. Contributions under the catch-up option may be taken on a pre-tax basis.
The IRS regulations indicate that, if the employee chooses the pay-as-you-go option, but fails to make the required payments, you may change to the catch-up option even without the employee’s prior agreement.
Employees on unpaid FMLA leave must still pay their share of health insurance premiums by either pre-paying, paying as they go, or making catch-up contributions.
Essentials of FMLA manual provides a wealth of information to help you comply with federal and state leave requirements, control costs related to leave taken, and minimize the potential disruption to your organization.
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