Status Change Effective in Previous Calendar Year

[Guest akwallace]

We have an employee who had a child on 12/31/03. On 1/12/04, the employee contacted us to make a change to the Health FSA based on the status change.

We make the increase he requested for the 2004 FSA election, but he is now arguing the point that he should be allowed to make an increased FSA contribution for 2003, even though payroll for the 2003 year was over and one with by the time he made his status change election.

His opinion is that the tax benefit to the employee (salary reductions) and source of funding need not occur within the same year.

In practical terms, any status change after Dec 15 could never be made, since payroll withholding of an additional amount could not be accomplished before the end of the year. He is stating that this does not agree with the intent of IRC 125 and TR 1.125-4.

Any thoughts on this?

Thanks.

[Guest JerseyGirl]

According to Harry Beker, changes can be made on a prospective basis only. See the attached piece, an Introduction to Cafeteria Plans, with special attention to page 6.

http://www.irs.gov/pub/irs-utl/intro_to_ca...a_plans_doc.pdf

With no future salary available during the 2003 plan year to be deferred, there is no way to achieve a change in status the employee is seeking. My guess is that this child arrived a little earlier than expected!

[Kirk Maldonado]

JerseyGirl:

Funny you should mention the timing of the child's birth.

I have boy/girl twins that were the first babies born in the year. While they made the front page of the paper the day they were born, that was far from the optimal tax result.