Can Cafeteria Plan Elections Be Changed After the Plan Year Begins?
As calendar-year cafeteria plans have begun the 2017 plan year, employers might be wondering whether it is really too late to allow employees to make changes to or revoke their flexible spending account (FSA) elections, especially if it is prior to the first payroll of the new plan year. Unfortunately, IRS Regulations require that FSA elections for the new plan year must be made no later than the last day of the prior plan year. So, for a plan year that began or renewed on January 1, any and all elections would have had to have been made no later than December 31, 2016. This is the case even if the employer has not yet run its first payroll of the new plan year.
Once a new plan year has begun, cafeteria plan elections can only be changed:
• If a “permitted election” event occurs, as set forth in Treas. Reg. § 1.125-4 (e.g., marriage/divorce);
• To correct a mistake (e.g., a participant with no children elected a dependent care FSA);
• To pass non-discrimination testing (i.e., an employer can unilaterally decrease or revoke the elections of highly compensated or key employees if necessary to allow the test to pass); or
• If a participant fails medical underwriting and is denied coverage under the plan (e.g., supplemental group term life insurance).
Allowing employees to make changes to their elections outside these parameters could result in hefty tax penalties and fines and could even result in disqualification of the plan. Therefore, we recommend that employers educate employees during open enrollment and advise them to give serious consideration to what elections they make before submitting their enrollment forms, because once a new plan year starts, it can be difficult, and sometimes impossible, to make changes to FSA elections.