How To Collect Premiums During Unpaid FMLA Leave
By: Michelle Higgins
When an employee is on leave under the Family and Medical Leave Act (FMLA), the employer must maintain benefits under the company’s group health plan.
Thus, employees generally must continue paying their share of the health insurance premiums.
But how do employees pay their share of the premiums when FMLA leave is unpaid? Employers may offer three payment options:
- Pre-pay
- Pay-as-you-go
- Catch-up
Employers may allow a combination of these options, such as pre-pay for part of the leave and catch-up for the remainder. Below is a breakdown of the three available payment options.
Option #1: Pre-pay
When unpaid FMLA leave is foreseeable, employers may allow employees to pre-pay their premiums. For example, if an employee is adopting a child and requests several weeks for bonding time but does not have enough vacation to cover the entire absence, an employer could allow the employee to pre-pay his or her premiums for the portion of the leave that would be unpaid.
Employers may not require an employee to pre-pay, so this cannot be the only option offered.
If an employee chooses this option, however, employers 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).
Option #2: Pay-as-you-go
Under the pay-as-you-go option, employees pay their share of the premiums based upon the agreed terms made between the employer and employee. 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 the agreed-upon system, the FMLA does allow employers 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 this because the employee would have to be reinstated to the health plan upon return from FMLA leave.
Therefore, employers may prefer to continue coverage by paying the employee’s share of the premiums, then use the catch-up option once the employee returns to work. Some insurance carriers recommend this as an alternative to dropping coverage.
Option #3: Catch-up
Under the catch-up option, the employer and 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, the employer and 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.
When the employee returns, the employer collects the current premiums plus any catch-up payments, perhaps taking double premiums, until 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.
Key to remember: 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 upon returning to work.
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