I charged my 2004 Flexible Spending Account for the full amount of
savings before the mid-point of the year and the account servicer paid
the medical providers up to 100% of what I would have put in for the
year.  My employer layed me off before the end of the year and docked
my severance for the dollars I had not put in the account yet.  Can
the employer dock me like that?  I'm suspicious, the accounting of it
was not through the payroll system.

Hello and thank you for your question.  I'm sorry to hear you lost
your job during the year.

Unfortunately yes, the employer can dock your severance pay for the
flexible spending amounts you've elected and not yet contributed.

"Amounts you receive as severance pay are taxable. A lump-sum payment
for cancellation of your employment contract must be included in your
income in the tax year you receive it."
IRS Publication 525
http://www.irs.gov/publications/p525/ar02.html

So by docking your severance pay, the result in terms of taxable
income and cash flow is the same as if you'd stayed on the job and
received the severance as regular pay.

Suppose you were applying 1,000 per month to the flex account,
reducing your gross pay from (also suppose) from $8,000 per month to
$7,000 per month.  So by mid-year you'd been paid $42,000, you'd paid
$6,000 into the plan, and your doctor bills were paid $12,000 by the
employer.  If your severance was a month's pay, then instead of giving
you $8,000 the employer took the $6,000 over-expense for itself, and
paid you $2,000.  This makes your taxable income for the year
$7,000 * 6 + $2,000 = $44,000 and your bills of $12,000 got paid tax-free.

Compare that if you worked 7 months as above and were then laid off
without any severance.  Your employer would still be justified in
taking the $5,000 over-expense out of your last check, and your
taxable income would be
$7,000 * 7 - $5,000 = $44,000

So although your employer was able to make itself whole out of the
severance pay, at least you got the full tax benefit of the plan (that
is, you didn't pay tax on the $12,000 that was paid to your medical
providers).

Search terms used
severance cafeteria site:irs.gov

Sincerely,
Google Answers Researcher
Richard-ga

This what I needed.