Disclaimer: I am not a benefits specialist so I would defer to a specialist, but I do have a few years of benefits admin experience back in the day.

Not sure of the legalities, but ultimately it does sound like your husband is left in the negative. My experience with FSAs is that the 'income' is usually reported to the IRS so that you are taxed accordingly, thus negating the benefit of an FSA; this would make the situation neutral, financially speaking.

The way the employer is doing it, it's as if they are attempting to recoup which I've never heard of, but this is not to say it's illegal or not permissible; I just don't know. This leaves your husband with the original deduction amount (e.g., $500 pre-tax contribution - $500 medical service = $0 - $500 deduction = -$500).

Depending upon your husband's status (exempt/non-exempt) and state, they may also be deducting from his pay unlawfully (some states require a deduction authorization agreement from the employee to be able to deduct from wages and if he is non-exempt and the deductions take him below the minimum wage, it may be unlawful).

In any event, hopefully there was some helpful info here. It may be helpful to consult with an attorney if the amount is significant, otherwise, I would wait to hear back from a seasoned benefits professional for better guidance.