Changing FSA plan year

[Guest parrot87]

Could someone provide a checklist to change the FSA plan year. We'd like to change it from January to July.

[J Simmons]

The Prop Treas Regs provide that the FSA must have 12 months coverage. Prop Treas Reg 1.125-5(e)(1).

Generally, the plan year is the coverage period. Prop Treas Reg 1.125-1(d)(5). But an FSA's 12-month coverage period may be different than the plan year, or the 12-month coverage period for FSAs of other types (health, day care, or adoption assistance). Prop Treas Reg 1.125-5(e)(3).

A change in the plan year must be for a 'valid business reason' such as group policy years changing and not to circumvent the 125 rules. Prop Treas Reg 1.125-1(d)(2). I'm not aware of the Prop Treas Regs addressing the change of a 12 month period for an FSA.

There can be a short plan year to accommodate the change in plan year. Prop Treas Reg 1.125-1(d)(3). In the case of a short plan year to accommodate the change in plan year, the period of coverage for the FSA must be the entire short plan year. Prop Treas Reg 1.125-5(e)(1).

You would face some logistical problems with the FSA amounts and payroll reductions if you attempted the short plan year after the period of the short plan year had begun. It is better to advertise it in advance to employees so that they know they are electing FSAs for a short plan year, and that payroll reductions are made accordingly over the short plan year.

[Guest parrot87]

OK, sounds good.

So come November we can advertise the short plan year

Employees make FSA deduction election for short year in January

Make a new FSA plan document for the July 1 to June 30 plan year

Does this sound like it passes mustard?

[J Simmons]

If you have a valid business reason for the change in plan year, it would seem so.