Mid Year Deduction Changes - Old & New Elections

[Guest kdimmick]

Here is my scenario:

A participant originally enrolled for a $1200 annual election in the Health FSA. 2 months into the plan year, the participant gained a dependent and increased their election to $2400. My problem is this - if the participant submits a claim for a date of service within the first 2 months of the plan (when the $1200 election was in effect), but the claim is for more than $1200, can they be reimbursed the full amount since the new election is $2400 (even though the new election was not in effect on the date of service of the claim)?

Also - can anyone direct me to documentation on this issue one way or the other?

Thanks for all your help!

[oriecat]

I don't know of any documentation on it, but we had this happen last year, and according to our TPA, the change in election affects the entire year, so dates of service prior to the change can be paid at the higher rate. The change doesn't create a 2 month period at 1200 and a 10 month period at 2400, but changes the whole year to 2400. They don't track the annual election separately. That's how it worked for us anyway.

[papogi]

I think that this all depends on whether or not a claims payor can deal with the complexities of having two different elections during a year. On the surface, it would seem that you should not allow the full $2400 before the date that election became effective. I also have never seen clear guidance on this, so the TPA has likely come to their conclusion because of administrative concerns. I happen to know that other TPA's are able to administer it differently, however, and my feeling is that separating the two elections makes more sense. Think of it this way: If someone changes medical plan elections during the year, claims should be paid based on the plan in place at the time of services. Really, why should a H/C flex account be treated differently?

[GBurns]

I have not seen anything from the IRS that directly addresses this issue other than Treas Regs 1.125-4© 1)(i) which states "...and make a new election for the remaining portion of the period (referred to in this section as an election change) if, under the facts and circumstances-..."

Note the "for the remaining portion of the period".

To me this goes hand in hand with the general requirement of 125 that the election must be prospective. If the Plan allows the payment of claims that are incurred before the $2,400 election, to me, that would not be prospective. It would be no different from the old Zero Balance MERPs that were outlawed way back at the outset of Cafeteria Plans and FSAs under section 125.

As papogi points out a claim incurred in another period and under other terms of coverage would not be allowed in a medical plan. So there should be no different treatment for an FSA which is really just another health plan.

[Guest kdimmick]

I'm also thinking that if the participant had incurred (and been reimbursed) the full $2400 prior to making the election change, we wouldn't have denied the election change, since it was an eligible event to change the election. So, it makes sense to me that there should be 2 coverage periods within the plan year. And that's right - a medical plan, in effect, uses different coverage periods when there is a change in tiers - it depends on the date of service to determine which "coverage tier" to pay.

Thanks, GBurns, for the Treas. Reg. quote - that is helpful. I think it is all in how we interpret the reg in these cases. Unfortunately, our software doesn't support the two different coverage periods, but I think we can work with it and make it work for us to go that route.