Deductible Increases Mid-Year

[Guest Joe Vasko]

Under the new regulations, can an employee change their annual election amount mid-year under the Health FSA, if the employer changes to a higher deductible health insurance program? The plan is 12/31 and their health insurance is 6/30.

Thanks, Joe

[papogi]

FSA's are not subject to the cost and coverage rules. No change is allowed.

[mroberts]

papogi is correct. we recently went through a thread on this board about different plan years for medical insurance and FSAs and this is one of the reasons it makes sense to have them on the same cycle. if the employer made the change to his medical insurance mid year then this point is moot, but 99% of the time employers make changes upon renewal.

[Guest Joe Vasko]

mroberts,

Is it possible to run a short plan year (01/01 - 06/30) even though employees have completed an election form for a full 12-month period. If so, this would allow eligible participants to enroll as of 7/01/02. Just a thought....

Thanks, Joe

[papogi]

This is the solution, but it should be done next year. Since employees made elections based on 12 months, you will run into all kinds of problems because of when employees expected to incur claims. Example: Employee elected $1000 and expects a $1000 bill in December. If you cut it off at 6/30/02, they can't get anything out of the account. For 1/1/03, employees should be made aware that their elections are for 6 months only. Then new elections can be amde on 7/1/03.

[Lisa Hand]

Joe:

In addition to those issues detailed about, the other problem you would run into if you changed to a short plan year as a result of the deductible change would be the appearance you were trying to circumvent this rule, which of course could result in compliance issues.

[Guest carsca]

Papogi,

How can you say that the coverage & cost rules don't apply to FSAs, when the regs (1.125-4(f)(2)(iv)) say that they apply to dependent care assistance plans (which presumably includes Dependent Care FSAs)?

Thanks.

[papogi]

125-4 (f) begins "Paragraphs (f)(2) through (5) of this section set forth rules for election changes as a result of changes in cost or coverage. This paragraph (f) does not apply to an election change with respect to a health FSA (or on account of a change in cost or coverage under a health FSA)." You are correct that these rules do apply to dependent care accounts, however. In my original answer, I only used "FSA" because I knew that Joe Vasko was concerned with health FSA's. I was responding to his specific inquiry. As a general answer, I should have prefaced "FSA" with "health."