EMPLOYMENT
& BENEFITS
LAW REPORT
A Newsletter from the Employee Benefits and
Employment and Labor Practice Groups
www.flastergreenberg.com
Editors’ Note…
By Allen P. Fineberg & Paul R. Russoniello
Allen P. Fineberg Paul R. Russoniello
This issue of the Employment and Benefits
Law Report features articles that focus on welfare
plans, which provide health insurance, dependent
care assistance, medical expense reimbursements
and other fringe benefits. The lead article
discusses a new means to directly pay medical
expenses under flexible spending accounts. As a
result, these accounts are now more readily
accessible to small and medium-sized employers.
A companion article addresses the employment
law implications of debit card programs and
other types of employer withholding to pay the
employee’s share of benefit costs.
Since our last newsletter, members of the
Employment and Benefits Law Practice Groups
have been in demand on the lecture circuit
throughout New Jersey and Pennsylvania. Our
attorneys have made presentations before business
and trade organizations on topics including:
sexual harassment in the workplace; employer
obligations under the HIPAA privacy rules;
representation of clients in benefit plan audits;
using IRA and other retirement assets for real
estate investments, and termination of employees.
We are currently planning a new program on
the use of employee stock ownership plans for
business buy-outs later this Spring. Information
on upcoming seminars being presented by
Flaster/Greenberg appears elsewhere in this issue.
If you have questions or comments after
reading about matters discussed in his report or
on other topics relating to employment or ben-
efits law, we encourage you to contact any of
our practice groups’ members.
Copyright © 2004
Spring 2004
Swipe Your FSA Administration Away
By Marc R. Garber and Elliot D. Raff
edical expense reimbursement
M accounts, either individually
or in combination with a
dependent care assistance reimburse-
ment program (often referred to as a
“Flexible Spending Account” or
simply “FSA”) have become an
Marc R. Garber Elliot D. Raff
increasingly popular benefit among
employers of all sizes. An FSA permits employees to set aside a portion of
their wages on a pre-tax basis to pay for medical or eligible childcare
expenses. Combined with a premium conversion plan (allowing employees
to also pay their share of health insurance premiums on a pre-tax basis),
an FSA helps close coverage gaps in the employer’s health insurance
programs on a tax-advantaged basis. For example, a health insurance
program may not cover dental benefits or eyeglasses, both of which can
be paid for pre-tax through an FSA.
On the surface, an FSA appears to be a “win-win” proposition as an
employee benefit:
• Employees realize tax benefits because the withheld amounts contributed
to the FSA will not be subject to FICA taxes. In some cases an
employee may also save income taxes on expenses paid with the FSA,
which otherwise might not qualify for the medical expense deduction
when paid on an after-tax basis.
• The employer also saves FICA taxes and generally incurs no expenses
(other than administrative costs) to offer the benefit.1
Unfortunately, an FSA has drawbacks that can discourage full employee
utilization and thus reduce the goodwill an employer hopes to engender
by offering the program. This article explains a new FSA feature that can
alleviate the most significant drawback—the often cumbersome adminis-
trative requirements of an FSA.2
(continued on page 4)
In This Issue. . .
Swipe Your FSA Administration Away ............................................1
Employee Debit/Credit Cards Require Advance Planning ..............2
April Employment Law Seminars ........................................................3
Employment and Benefits Law Report • Flaster/Greenberg P.C.
 2
Employee Debit/Credit Cards Require Advance Planning
By Michael D. Homans
mployers that provide company debit or credit cards
E
to employees for any reason, including setting up a
flexible spending account system, often encounter a
downside from such benefits—unauthorized use of the
cards for non-business purposes. Before implementing a
system and handing out cards to employees, employers
Michael D. Homans should do three things: (1) develop a plan to prevent
unauthorized employee use; (2) review applicable wage
payment and garnishment laws that limit the ability to recover unauthorized
payments; and (3) devise a system, consistent with the law, to recover
funds from employees in the event of unauthorized use.
As many employers are aware, state and federal laws severely limit an
employer’s right to garnish, collect, withhold or deduct funds from an
employee’s paycheck. For example, the federal Consumer Credit
Protection Act limits the amount that an employer may garnish from
an employee’s earnings in any one week. This limitation is generally
25 percent, with certain exceptions and variations.
In addition, varying state laws, including those in New
Jersey and Pennsylvania, restrict the employer’s ability
to withhold or deduct money from an employee’s
wages. With few exceptions, an employer trying to
recover misappropriated funds from an employee cannot
treat itself more favorably than it would a third-party
creditor seeking to recover a debt from an employee.
In New Jersey, withholdings from employees’ wages are
limited by statute to 15 distinct categories, and generally require
advance, written authorization from the employee or must be authorized
by a collective bargaining agreement. Similarly, in Pennsylvania, the law
limits deductions by employers to those authorized by law, with 13 types
of deductions specified.
Although employers should review their state’s law for each deduction,
common and typical employer withholdings include:
• Authorized payments for employee medical insurance, pension, retire-
ment or investment plans
• Authorized payments for employee savings plans
• Payments for company products, in accordance with a payment schedule
contained in the original purchase agreement approved by the employee
and employer
• Payments for employer loans in accordance with a payment schedule in
the original loan agreement
• Payments for safety equipment
• Payments to correct payroll errors
• Contributions authorized by employees and approved by the employer
for generally recognized charities, such as the United Way
• Union dues and initiation fees
This listing is not exhaustive and not applicable in every state, but one
thing is clear - there is no specific authorization under New Jersey or
Pennsylvania law for automatic payroll deductions to recover misappro-
priated funds by an employee. Unless the employer can obtain an
advance, written authorization that comes within the specific provisions
of the applicable statute, it may need to seek payment from the employee
Employment and Benefits Law Report • Flaster/Greenberg P.C.
separate from the payroll process, or pursue its
claims in court. Employers should ensure that
any such attempt at recovery complies with the
wage payment and garnishment laws of the state
in which the employee works.
Also, as a general rule, employers should not
implement wage deductions or garnishments
that leave the employee with take home pay that
is below the minimum wage, unless specifically
approved by statute or a court of law. The public
policies behind these laws disfavor withholdings
that deprive an employee of the ability to main-
tain a basic standard of living.
So what should an
employer do to protect
itself against unauthorized
use of credit or debit cards
by employees? In New
Jersey and Pennsylvania, the
following steps provide a
good start: First, obtain advance, written
authorization from the employee to
recover any unauthorized payments as
part of the agreement to the permitted
uses of the card. Second, if an unauthorized pay-
ment occurs, inform the employee promptly and
provide notice that the amount will be deducted
from the next paycheck, pursuant to the authori-
zation. And, third, ensure that any such deduc-
tion is no greater than 25 percent of the
employee’s pay for the pay period and does not
reduce the employee’s pay to less than the mini-
mum wage. If a large sum of money is misap-
propriated, employers should consider seeking
the advice of counsel because other legal issues
— including possible insurance recovery, or
claims of theft and fraud — may be involved.
Though general principles have been outlined,
employers should understand that the law relating
to the use of employee credit and debit cards is
still developing. Each situation should be inde-
pendently reviewed and analyzed by counsel to
ensure compliance with applicable laws.

This report, published as a service
to Flaster/Greenberg clients and
interested readers, is for general use
and information. The content should
not be interpreted as rendering legal
advice on any specific matter.

Swipe Your FSA Administration Away
I. Complexities of FSA
Administration
There are two aspects of FSA
administration that tend to discourage
participation by the very employees
who can benefit the most from the
program: (1) the employee must retain
and submit actual receipts; and (2) the
employee has to pay for the service or
goods up front and then seek reim-
bursement. Submitting receipts can
frustrate busy employees who must
save, summarize and then submit them.
Also, employees concerned about
privacy may be reluctant to submit
receipts, especially if the claims are
processed by the employer in-house
rather than by an outside administrator.
The second aspect, pay first and obtain
reimbursement later, can lead an
employee to think that he or she is
paying twice — first through payroll
deductions, and again, at the doctor’s
office or drug store. This process may
also strain an employee’s cash flow.
These two issues may lead employees
to forgo the significant tax savings they
would otherwise enjoy.
II. Debit Card Solution
In an effort to relieve the paperwork
and cash flow issues, some large
employers began issuing special FSA
debit cards, for example, through Visa®
or MasterCard® affinity programs, to
eliminate these difficulties. Such
arrangements allow participants to
simply swipe a special FSA debit card in
order for the provider, such as the
doctor or pharmacy, to receive payment.
Simultaneously, the payment would be
charged against the employee’s FSA
and thereby eliminate the burdensome
paperwork and cash flow problems
described above.
Despite the obvious attractions, these
programs raised several unresolved legal
issues. First, the FSA regulations require
that every claim be “substantiated,”
typically by having the actual receipts
in hand. The debit card programs elim-
inated the requirement that employees
submit actual receipts, thus raising the
issue of whether the debit card program
violated the substantiation requirement.
Employment and Benefits Law Report • Flaster/Greenberg P.C.
4
Second, there was concern about
employees using the FSA debit card for
non-medical expenses, such as the
purchase of greeting cards, toiletries,
and other non-medical incidentals at a
pharmacy. In the absence of affirmative
guidance, these concerns discouraged
all but the largest employers from
implementing debit card FSA programs.
III. IRS Guidance
Last May, the IRS issued Revenue
Ruling 2003-43, approving a debit
card program in connection with an
FSA. This ruling has fueled the expan-
sion of debit card programs so that
now an employer of any size can pro-
vide benefits in this manner. Under this
ruling, an electronic debit card can be
issued to FSA participants and used by
them to pay for goods and services that
are covered by the FSA.
Despite the obvious attractions,
these programs raised several
unresolved legal issues.
Example: Jane Smith’s health
insurance requires her to pay a $20
co-payment for each doctor’s visit.
With an FSA debit card, Jane can
simply swipe her card at the time of her
appointment and the doctor receives
payment, as if it were a credit card and
the employee’s FSA automatically is
charged the cost of the co-payment.
Provided the FSA debit card program
is structured properly, Revenue Ruling
2003-43 clarified that the use of the card
does not violate the FSA rules. Thus,
using a properly designed FSA debit
card will result in the favorable tax
results provided by the FSA, i.e., the
expense reimbursements are excluded
from the employee’s gross income. The
FSA debit card program approved by
the IRS had the following features:
• To receive the debit card, the
employee was required to certify in
(continued from page 1)
writing that he would only use it for
covered medical expenses that had
not been reimbursed and would not
be claimed under any other plan.
• This certification was printed on
the debit card and was considered
an affirmation by the employee of
its proper use each time the card
was swiped.
• The employee did not have to
submit receipts, but was required to
obtain and keep all receipts.
• Expenses were “deemed” to be
substantiated if the claim (request
for payment via the debit card
system) was submitted by a vendor
that had one of a number of
pre-approved vendor codes (that is,
the debit card system had codes for
typical medical service providers and
merchants of goods approved for
medical expense reimbursement,
such as pharmacies) and the amount
of the claim was equal to the fixed
co-payment or co-insurance amount,
or a multiple thereof, and/or was a
regularly scheduled expense (such as
prescription drug refills).
• All claims were subject to audit and
employees could be required to
provide receipts to support a claim.
If a claim should not have been paid,
then the employee was obligated to
either repay the employer, have future
benefits offset until the erroneous
payment was recouped, or else have
his or her wages garnished. If these
recovery methods failed, the
employer was expected to treat the
employee’s obligation as a general
business debt and could utilize its
standard debt collection procedures.
• Under certain circumstances, the
card would be revoked, for example,
if the employee failed to repay an
erroneous claim and upon termina-
tion of employment.
• The plan document specifically
authorized the issuance of debit
cards and included the provisions
described above.
The design described in the ruling is
(continued on page 5)
 3

April Employment Law Seminars Practice Group Services

ichael D. Homans will be Employee Benefits
M a guest speaker at the
10th Annual Northeast
Regional Employment Law

Design and implementation of qualified
retirement plans

Fiduciary counseling
Institute, sponsored by the
ERISA and other employee benefits
Pennsylvania Bar Institute, April litigation
14 and 15, at the Pennsylvania
Design and implementation of Employee
Convention Center in Stock Ownership Plans (ESOPs) and use
Philadelphia. The annual of ESOPs in corporate buy-outs
institute, considered the region’s premier employment law seminar,
Executive compensation and other
attracts employment lawyers and human resources professionals, non-qualified deferred compensation
primarily from Pennsylvania and New Jersey. Homans returns for programs
his fourth consecutive year on April 15th to present his workshop
Stock options, phantom stock and
titled “Stray Remarks and ‘Me Too’ Evidence: Navigating Open other incentive stock programs
Waters in the Third Circuit.” He will present a systematic review of
Cafeteria plans and other welfare benefit
recent case law, benchmark cases and advanced evidentiary issues in programs
employment litigation. For more information about the
IRS and DOL audits and compliance
Employment Law Institute, contact the Pennsylvania Bar Institute
at (800) 247-4724. Employment and Labor
Homans also will be among
Employment discrimination counseling
the featured speakers at an all-day and litigation
seminar for CPAs, accountants,
Preparation and enforcement of noncom-
payroll professionals, human pete agreements
resource professionals, controllers
Human Resource counseling and training
and CFOs, on “Payroll Basics in
Preparation of employee handbooks
New Jersey,” Tuesday, April 13,
Guidance concerning sexual harassment
at the Clarion Hotel & and discrimination issues
Conference Center in Cherry
Hiring and disability, termination and
Hill. He will discuss payroll and wage payment issues relating to discipline counseling
paid time off, medical leaves of absence and other time not worked
Union-management relations advice
by employees. For more information, contact Lorman Education
Whistleblower litigation
Services at 715-833-3940.

Wrongful discharge and/or breach of
employment agreements

Employee Benefits & Employment and Labor Law Practice Groups

Jeffrey A. Cohen Kenneth S. Goodkind Vincent J. Nolan III
(856) 382-2240 (856) 661-2273 (856) 661-2275
Jeff.Cohen@flastergreenberg.com Ken.Goodkind@flastergreenberg.com Vincent.Nolan@flastergreenberg.com

Allen P. Fineberg Stephen M. Greenberg Elliot D. Raff

(856) 661-2264 (856) 661-2261 (856) 382-2241
Allen.Fineberg@flastergreenberg.com Steve.Greenberg@flastergreenberg.com Elliot.Raff@flastergreenberg.com

Richard J. Flaster Michael D. Homans Paul J. Russoniello

(856) 661-2260 (856) 661-2271 (856) 661-2270
Rick.Flaster@flastergreenberg.com Michael.Homans@flastergreenberg.com Paul.Russoniello@flastergreenberg.com

Marc R. Garber (Of Counsel) J. Philip Kirchner

(856) 382-2237 (856) 661-2268
Marc.Garber@flastergreenberg.com Phil.Kirchner@flastergreenberg.com

www.flastergreenberg.com
 5

Swipe Your FSA Administration Away (continued from page 4)

not required by law; it is simply the design reviewed and • Expansion of Covered Medical Expenses: In another
approved by the IRS. Nonetheless, the commercial debit recent Revenue Ruling (Rev. Rul. 2003-102), the IRS
card programs we have reviewed follow the approved design. concluded that an FSA may reimburse an employee for
Before implementing an FSA debit card program, employers the cost of certain over-the-counter medicines, such as for
are advised to confer with counsel to ensure that the pro- allergies and pain relief. This makes FSA participation
gram is properly structured. even more attractive to employees, tending to mitigate
Under prior law, the employer was required to issue a concern over the “use it or lose it” feature of FSAs.
Form 1099 to all providers—doctors, pharmacies, etc.—that As noted, FSA debit card programs are expanding rapidly
are paid at least $600 a year under the FSA, which could be and there are several widely available programs. However,
quite burdensome. Fortunately, this requirement has been this is still a new structure and no company offering a debit
eliminated under the recently enacted Medicare law. card program has more than short-term experience. Further,
Another concern arising in connection the employer is relying on others
with establishing procedures to recover to ensure proper administration and
erroneous payments involves state wage …FSA debit card programs legal compliance, and may easily
payment laws. Since state laws may vary, it become caught up in problems
is difficult to generalize. However, state are expanding rapidly and caused by these other parties.
law typically restricts an employer’s right Consequently, an employer should
there are several widely take proactive steps to ensure that
to withhold wages. Often, though, this can
be surmounted with full disclosure, written available programs. the program is structured in a man-
consent, and overall limits on the amount ner consistent with IRS guidance.
that may be withheld. This issue should be Plan documents and employee
reviewed carefully before implementing an FSA debit card communications must be thorough
program. (A related article on the wage and hour law and accurate. Contracts to obtain these programs must be
implications of a debit card FSA program appears on page fair and contain adequate remedies to protect the employer’s
2). Thorough explanations of the recovery procedures for interests. Administrators also should have sufficient insurance
unauthorized reimbursements should be included in the coverage in case problems emerge.
enrollment materials and summary plan description. Written
Conclusion
consent to the use of these procedures also should be
obtained from the employee. An FSA debit card program is one way to provide additional,
tax-advantaged benefits to employees in a manner that is easy
IV. Expansion of FSA Debit Card Programs for employees to understand and easy to use. With the
Since the IRS ruling was issued, we have seen a rapid expansion of broadly available commercial programs, even
expansion of FSA debit card programs. Under agreement small employers now can enroll in this type of program. Under
with a debit card-issuing bank, many benefit consulting firms the surface of this increasingly popular employee benefit, an
can now offer FSA debit cards to clients of any size. The FSA debit card program is a complex structure that must
local firm is an outlet and provides administrative support for comply with many overlapping laws. An employer should
the companies that have actually structured and manage the seek reliable independent counsel. Making assumptions that
debit card system. the companies offering the program and providing the
administrative services have given proper attention to these
Apart from the increased certainty provided by the IRS,
issues could lead to a false start.

there are other factors driving the popularity of FSA debit
card programs:
• Health Insurance Inflation: With health insurance
premiums on the rise, employers are looking to hold costs
1
In limited cases it is possible that the employer will incur a cost to reimburse expenses
down. One strategy is to move toward an HMO plan or through the FSA, because the regulations require that FSA reimbursements up to the
plans with higher deductibles and co-payments. The annual limit elected by the employee must be available at any time during the plan year.
impact of this can be offset somewhat through FSA Therefore, if an employee elects FSA contributions of $500 per month and has $5,000
of reimbursable expenses on March 1st (when he has only contributed a total of
participation and debit cards facilitate this. $1,000 for two months), he is entitled to the full $5,000 reimbursement, even if he
terminates employment the next day. While there are certain strategies to reduce this
• HIPAA Privacy Concerns: Out of concern for the exposure (which are beyond the scope of this article) the risk cannot be completely
HIPAA privacy standards, employers that previously eliminated.
administered FSAs in-house are outsourcing this service, 2
Another significant requirement imposed by the FSA regulations that can discourage
employee participation is a “use it or lose it” rule which provides that if an employee’s
often to administrative firms that are now offering debit contributions to the FSA exceed his reimbursable expenses for the year, his excess con-
card programs. tributions cannot be refunded.

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