Administering a Health Flexible Spending Account (FSA) can be challenging, especially when employees request midyear changes to their elections due to unforeseen medical circumstances. This blog post aims to clarify the rules surrounding midyear election changes and provide practical tips for employers to manage these situations effectively.
Can Employees Change Health FSA Elections Midyear?
Question: Can employees reduce their Health FSA contributions if they are prevented from receiving anticipated medical care after enrollment?
Answer: No, employees cannot change their Health FSA elections under these circumstances. According to IRS regulations, an employee’s Health FSA election is irrevocable during a plan year unless an event occurs that fits within one of the exceptions available under IRS regulations or other guidance. Changes in medical condition or a provider’s recommendation do not qualify as changes in status and do not fall within the other exceptions applicable to Health FSAs.
Examples of Non-Qualifying Situations
- Pregnancy and Laser Eye Surgery: If a doctor refuses to perform laser eye surgery on an employee who is pregnant, the employee cannot change their Health FSA election.
- Dental Work Changes: If an employee’s spouse does not undergo planned dental work because the dentist’s recommendation changed, the employee cannot adjust their Health FSA contributions.
These situations do not qualify as “mistakes” that would allow an election change. The IRS’s 2007 proposed cafeteria plan regulations include an example where an employee elects Health FSA salary reductions for the next plan year in anticipation of eye surgery. If the surgery cannot be performed after the plan year starts, the employee must forfeit the remaining balance under the use-or-lose rule if their other eligible medical expenses are less than the amount contributed.
Minimizing Employee Relations Issues
While election changes are not allowed under these circumstances, employers can take steps to minimize employee relations issues:
- Clear Communication: Ensure that enrollment and other materials clearly explain the limited reasons for midyear election changes. Including real-life examples can be helpful.
- Remind Employees of Eligible Expenses: Employees may still use the funds by submitting other eligible expenses for reimbursement.
- Plan Amendments: Consider amending your plan to allow Health FSA carryovers of up to $660 to the next plan year. The maximum carryover amount is indexed, so stay updated on the latest limits.
- Grace Period: Adopt a grace period to give employees extra time to use up remaining funds.
By proactively addressing these issues, employers can help employees better understand their Health FSA options and reduce frustration related to midyear election changes.
Source: Thomson Reuters