Scenario:

A 125 Plan Participant claims and is reimbursed for the entire annual declared amount out of their Medical Reimbursement account. The participant is terminated early in the plan year and the Plan Sponsor does not have the opportunity to collect the payroll deductions.

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Question:

Can an 125 Plan Sponsor ask a terminating employee to pay this "at risk" amount out of their final paycheck?

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Is it legal for the Plan Sponsor to ask them to do this?

Is it legal to do this if the Plan Sponsor tells the participant upon employment that this "at risk" amount will be withheld from their paychecks?

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I don't think it is, but I need your opinions.

Thanks for the help,

Lori M. Craun

No. This is part of the risk the employer has when sponsoring on of these plans. That is why most plans have a cap on the unreimbursed medical benefit.

Lisa,

Do you know the IRS Regulation or know where I can refer to this in writing?

Lori M. Craun

Prop. Treas. Reg 1.125-1, Q/A-17
Prop. Treas. Reg 1.125-2, Q/A-7