by admin | May 1, 2025 | Blog
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
by admin | Aug 15, 2024 | Blog
Navigating the complexities of Dependent Care Assistance Programs (DCAP) can be challenging, especially when dealing with midyear election changes and nondiscrimination rules. This blog post will explore whether an employee can begin contributing to a DCAP midyear if their spouse’s contributions are cut off to avoid a nondiscrimination failure, and whether an employer can cut off an employee’s salary reductions midyear for the same reason.
Midyear DCAP Election Changes
One common scenario involves an employee who initially elected not to make DCAP salary reductions because their spouse, employed elsewhere, made a $5,000 DCAP election. If the spouse’s contributions are discontinued midyear to avoid a nondiscrimination test failure, the employee may wish to start making DCAP salary reductions. According to IRS officials, a cafeteria plan may permit this midyear election change if it allows changes due to a “change in coverage under another employer plan.”
Key Points to Consider:
- Plan Provisions: Ensure your cafeteria plan includes provisions for election changes due to changes in coverage under another employer plan.
- Employee Certification: The employee must certify that the change in coverage event occurred.
- Contribution Limits: The maximum annual DCAP exclusion for a married couple filing jointly is $5,000. Employees should not exceed this limit, considering the spouse’s contributions already made for the year.
Cutting Off Salary Reductions Midyear
Employers may also need to cut off an employee’s salary reductions midyear to comply with nondiscrimination rules. While not explicitly mentioned in IRS regulations, IRS officials have informally commented that such provisions do not violate the irrevocable election requirement.
Steps for Employers:
- Plan Provisions: Include provisions in your plan that allow the plan administrator to reduce or discontinue salary reductions to comply with nondiscrimination rules.
- Monitoring Compliance: Regularly monitor compliance with nondiscrimination rules throughout the plan year to make necessary adjustments before year-end.
Understanding and implementing midyear DCAP election changes and managing nondiscrimination compliance are crucial for both employers and employees. By ensuring your cafeteria plan includes the necessary provisions and monitoring compliance, you can navigate these challenges effectively.
Source: Thomson Reuters
