What Is the FSA Uniform Coverage Rule?

The uniform coverage rule is an Internal Revenue Service (IRS) regulation governing how employees access funds in a Health Flexible Spending Account (FSA). Offered by employers as part of a Section 125 cafeteria plan, this rule dictates that the total amount an employee elects to contribute for the year must be available from day one, regardless of their payroll contribution schedule.

Core Principle of the Rule

The uniform coverage rule mandates that the full annual amount an employee elects for their Health FSA is available for reimbursement from the first day of the plan year. This availability cannot be limited to the amount contributed through payroll deductions at any given time. This structure means an employer effectively extends a line of credit to the employee for medical expenses, which is repaid through pre-tax contributions over the year.

For example, an employee elects to contribute $2,600 to their Health FSA for the year. In February, after contributing only $400, they have a medical procedure that costs $2,000. Despite the low balance, the employee can submit a claim and must be reimbursed for the full $2,000.

The employer continues to collect the employee’s regular payroll deductions for the rest of the year to repay the advanced amount. This ensures employees can pay for large medical, dental, or vision expenses that arise early in the plan year. The rule applies regardless of whether the plan includes a carryover or grace period provision.

Scope of Application

The uniform coverage rule applies exclusively to Health FSAs, which are used for qualified medical expenses as defined by the Internal Revenue Code. It is important to understand that this rule does not extend to all types of benefit accounts.

Dependent Care FSAs

Dependent Care FSAs, used for expenses like daycare, are not subject to the uniform coverage rule. Reimbursements from these accounts are limited to the amount an employee has contributed at the time a claim is submitted. For instance, if an employee has a $500 daycare bill but has only contributed $300, they can only be reimbursed for $300 until more funds are added.

Health Savings Accounts (HSAs)

HSAs are also exempt from this rule because they are individually owned bank accounts, not lines of credit. Funds must be deposited into the account before they can be used to pay for medical expenses. An accountholder cannot spend more than the cash balance available in their HSA.

Health Reimbursement Arrangements (HRAs)

Health Reimbursement Arrangements are funded solely by the employer and are not governed by the uniform coverage rule. The availability of HRA funds is dictated by the specific terms in the employer’s plan documents, which outline when and how funds are available for reimbursement.

Implications of Employment Termination

The uniform coverage rule creates specific financial outcomes when an employee leaves their job mid-year. The financial risk associated with this rule is borne entirely by the employer.

If an employee leaves their job after being reimbursed for more than they have contributed, the employer faces a shortfall. For instance, if an employee who elected $2,600 receives a $2,000 reimbursement but leaves after contributing only $600, the employer loses $1,400. The IRS prohibits employers from recouping this difference from the employee, such as from a final paycheck.

Conversely, if an employee leaves after contributing more than they have been reimbursed, they may have the right to continue coverage under the Consolidated Omnibus Budget Reconciliation Act (COBRA). By electing COBRA and continuing to make after-tax contributions, the employee can submit claims for qualified medical expenses through the end of their COBRA coverage period.