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

DEPARTMENT OF THE TREASURY
Internal Revenue Service 26 CFR Part 1 [TD 8966] RIN 1545-AT47

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

AGENCY:  Internal Revenue Service (IRS), Treasury.

ACTION:  Final regulations.

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 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 §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
§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 §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:

'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), 29 U.S.C.
	2601 et. seq., 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 FMLA, 29
U.S.C.?

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 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 §1.125-4 (e.g., because of
changes in status or cost or coverage changes as provided under
§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 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 aftertax
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
pretax 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
§1.125-4) under the same 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 '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: § 1.125-4 Permitted
election changes.

* * * * *

(g) Special requirements relating to the Family and Medical Leave
Act. * * * See '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).

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