Navigating cafeteria plans can be tricky for both employers and employees. A common question is whether financial hardship allows midyear election changes to health FSAs. Unfortunately, it doesn’t.
Why Financial Hardship Isn’t a Qualifying Event
IRS rules state that cafeteria plan elections are irrevocable for the plan year unless a qualifying event occurs. Financial hardship, such as buying a new house and facing unexpected expenses, does not qualify as a permitted election change event.
Qualifying Events for Election Changes
The IRS outlines specific events that allow for midyear election changes, including:
- Change in marital status
- Change in the number of dependents
- Change in employment status
- Significant cost or coverage changes (not applicable to health FSAs)
- Qualified medical child support orders
Since financial hardship does not fall under these categories, employees must wait until the next open enrollment period to make changes to their health FSA elections.
Communicating Plan Rules
To minimize confusion and potential employee relations issues, employers should clearly communicate the rules and limitations of their cafeteria plans. Providing real-life examples can help employees understand which events qualify for election changes and which do not. This proactive approach can prevent misunderstandings and ensure employees are well-informed.
Plan Design Considerations
Employers may also consider redesigning their health FSA plans to eliminate midyear election changes altogether, except in cases of qualified medical child support orders. This can simplify plan administration and reduce the challenges associated with determining coverage amounts for the remainder of the plan year.
While financial hardship is a difficult situation for any employee, it does not justify a midyear election change to a health FSA under current IRS rules. Employers can support their employees by providing clear communication about plan rules and considering plan design adjustments to streamline administration. By taking these steps, employers can help ensure a smooth and compliant operation of their cafeteria plans.
Source: Thomson Reuters