As we ring in the New Year, 2020 calendar-year cafeteria plans have also started a new Plan Year. Employers might be wondering whether it is really too late to allow employees to make changes to, or even 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 and are irrevocable unless the employee experiences a permitted election change. Under most circumstances, 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, 2019. 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 started, cafeteria plan elections are irrevocable and can only be changed under the following circumstances:
- If a “permitted election” event occurs, as set forth in Treas. Reg. § 1.125-4 (For example, marriage/divorce, birth of a child, change in employment status that impacts eligibility, change in cost of premiums or dependent care to name a few);
- To correct a mistake (e.g., a participant with no children elected a dependent care FSA, or an employer sends an enrollment file that has data in the wrong column).
Note: This generally does not cover a mistake of law or if an employee elects an amount for an expense that will not be eligible. The facts and circumstances will need to be weighed carefully to determine if a change due to a “mistake” is warranted;
- 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 circumstances could result in hefty tax penalties and fines. Allowing changes outside these circumstances can also result in the disqualification of the plan and loss of tax-preferred status for all participants. 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.