QUESTION: I administer our company’s health FSA, and employees often ask me if they can reduce their contributions because something happened after enrollment that prevented them from receiving anticipated medical care. For example, a doctor would not perform laser eye surgery on an employee who was pregnant, and an employee’s spouse did not have planned dental work because the dentist’s recommendation changed. Am I right to deny these types of requests?
ANSWER: Employees cannot change their health FSA elections under the circumstances you describe. 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 applicable regulations or other IRS guidance. Changes in medical condition or in a health care provider’s recommendation are not changes in status, nor do they fall within the other exceptions applicable to health FSAs.
Moreover, these situations don’t qualify as “mistakes” that would potentially allow an election change. In fact, the IRS’s 2007 proposed cafeteria plan regulations include an example involving an employee who elects health FSA salary reductions for the next plan year in anticipation of having eye surgery. After the plan year starts, the employee learns that the surgery cannot be performed. The employee’s other eligible medical expenses for the plan year are less than the amount contributed, and, according to this example, the employee must forfeit the remaining balance under the use-or-lose rule.
Although election changes are not allowed under these circumstances, you can help to minimize employee relations issues by ensuring that enrollment and other materials clearly explain the limited reasons for election changes. Including a real-life example may be helpful. You can also remind employees that they may be able to use the funds by submitting other eligible expenses. In addition, your plan could be amended to allow health FSA carryovers of up to $500 or to adopt a grace period, which would give employees extra time to use up remaining funds.
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?”), XVI.B (“Grace Periods and the Use-or-Lose Rule”), XIX.E.3 (“The Coverage Period Generally Must Be 12 Months: Exception for Certain Changes in Status”), and XXI.H (“Carryovers and the Use-or-Lose Rule”).
Contributing Editors: EBIA Staff.