QUESTION: One of our employees elected to contribute $2,000 to his health FSA for 2025 to help pay for anticipated dental work. He just bought a new house, and now he says he cannot afford to continue contributing to the health FSA. He wants to reduce his health FSA election for the rest of the year and says he is postponing the dental work to save money. Can we allow him to make this change?
ANSWER: Your employee cannot change his health FSA election under the circumstances you describe. Under the cafeteria plan rules, employees’ elections are generally irrevocable for the plan year. Midyear changes are not permitted unless an election change event occurs that fits within one of the exceptions available under applicable IRS rules.
A change in an employee’s financial condition by itself is not a permitted election change event, even if it affects the employee’s anticipated medical expenses. For example, a change in financial condition is not a “change in status” that might otherwise allow employees to change their elections. Furthermore, having less money to pay for benefits is not a “cost increase” because, under IRS rules, a cost increase only occurs when there has been a change in the amount that an employee is charged for benefits, which has not occurred here. (Note that the IRS rules allowing cafeteria plan election changes in the event of certain cost changes do not apply to health FSAs, but we mention them as clarification.) Nor do the circumstances you describe qualify as an employee “mistake” that might otherwise allow an election change. Your employee will have to wait until the next open enrollment period to make a health FSA election change.
Although you cannot allow an election change under these circumstances, there are steps you can take to help minimize the employee relations issues that can result from situations like this. For example, you can ensure that employee communications about the plan clearly explain which events will or will not allow employees to make election changes. Including real-life examples may be helpful. You also could re-design your health FSA so that midyear election changes are not permitted for any reason (except in accordance with a qualified medical child support order requiring a child to be covered). An employer might do this to minimize the administrative challenges that can be caused by health FSA election changes (such as the difficulties in determining what the employee’s coverage amount should be for the rest of the plan year).
For more information, see EBIA’s Cafeteria Plans manual at Sections XIII.F (“Participant Elections Must Be Irrevocable During the Plan Year, With Certain Exceptions”), XIV (“When May Participant Elections Be Changed?”), and XXI.D (“How Do Midyear Election Changes Affect a Participant’s Annual Coverage Limit?”).
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