HCSA Election Change

[PhilB]

OK, this one was just different enough that I thought I'd throw it out there for comment, if anyone is interested. For the record, I searched the Boards and other areas and couldn't find anything quite equivalent.

Our employee was pregnant at open enrollment and elected a generous amount in her Health Care Spending Account to cover her medical expenses associated with the birth of her child. She recently miscarried and wants to know if this qualifies as a reason to change the election amount, as she will no longer incur the expenses she had planned on.

My opinion is that this change in her medical condition, unfortunate though it may be, does not fit within any of the regulations' exceptions. Thoughts?

[papogi]

I agree. Without a doubt, this is adding insult to injury for this employee, but I can't see how she can change her election. BenefitsLink has a question in the Q&A section that is somewhat similar:

Changing a Health FSA Election Because New Medical Condition Prevents Planned Surgery

(Posted January 22, 2001)

Question 12: During the December annual open enrollment period, I elected health FSA coverage in the amount of $3,000 for 2001. The health FSA is part of a cafeteria plan with a calendar plan year. I am currently having $3,000 taken out of my pay check this year as pre-tax salary reductions ($115.38 per bi-weekly pay period). My plan was to have Lasik eye surgery. In November of 2000, I saw my regular eye doctor and he said I was a candidate for the surgery. I scheduled the surgery for a day in January. On the day of the surgery, I had to first meet with the surgeon in the morning. She examined my eyes and discovered two problems (one being glaucoma and the other being pupil size) that would make me a bad candidate for the surgery. In fact she said she would not do it because I would have poor results at best. So my question is this, can I stop my pre-tax salary reductions so I will not lose the $3,000? I wanted the surgery. That's why I signed up for the health FSA, but because of the disease discovered, the doctor will not do it.

Answer: In our view, based on prevailing IRS guidance, you cannot change your election just because the Lasik surgery is not a viable option for you.

Under the rules governing cafeteria plans and health FSAs, your election is irrevocable for the duration of the plan year unless you can show that your requested election change meets one of the exceptions contained in Treas. Reg. Sec. 1.125-4. Unfortunately, a change in a participant's medical condition, or a change in the advisability of having a particular medical procedure performed, does not fit within any of the regulations' exceptions. Nor is your situation a mistake that might justify the undoing of your election.

When you signed up for the health FSA, you signed up for a mini-insurance plan with an annual maximum of $3,000 (the medical condition that gave you cause to elect the coverage is irrelevant). Even though your medical situation may have changed, you still have the $3,000 mini-insurance coverage available for other unreimbursed medical expenses incurred by you and your dependents during the year.

As a final note, the answer above is based on prevailing IRS guidance. In the highly unlikely event that your employer's health FSA or cafeteria plan document contains language that could be interpreted as giving you the right to change your election in these circumstances (i.e., a change in the advisability of having a particular medical procedure performed), you might have a valid contract-based claim under ERISA. (Such plan language, if it exists, would cause the health FSA and cafeteria plan to be out of compliance with Internal Revenue Code requirements, with possible adverse tax consequences.)

[Guest Jeffrey N]

Yes, but the goverment has come out now and stated that an unborn child is considered a "person". Possibly because of this newly defined status of the unborn child it may fall under status change (death) if someone wanted to push the issue.

Just a thought.

[PhilB]

That thought had occurred to me. However, I've not seen anything about the Government declaring an unborn child or fetus a person. Can you cite a reference? Even if this is the case, I'm still not sure whether it would apply without a specific regulation.

[papogi]

Interesting point. I still stand by my opinion, but this will be a closely watched case if something like this ever goes to court. I can't help but think that if they ever allow election changes due to a miscarriage, they'll have to begin allowing changes due to a child's conception.

This employee should have just made a mid-year election change as of the birth of the child. She should have elected an amount that corresponds to her pre-natal expenses at the beginning of the plan year. The birth of the child would (if their 125 allows it) give her the right to increase her FSA, and this would have been effective as of the date of birth of the child. The increased expenses would have then been reimbursable, both for the mom and for the child, since they would have been incurred on the first day that the increase went into effect. This way, she would have avoided being stuck with the large annual election.