FSA Employer Risks

[Guest jrodgers32]

Our municipal government has changed its health plan in the middle of its fiscal year, and notified employees that they may change their FSA allocation, presumably because this change constitutes a qualifying event for all employees.

It is quite clear that an employee may leave service and not owe any sort of refund on claims paid to them by the FSA in excess of the employee's contribution. After a qualifying event which does not involve the employee leaving service, may they elect to discontinue participation in the FSA, however?

That is, Jane has a $5000 annual election to her medical FSA. Four months into the fiscal year, Jane has received $5000 in reimbursements for qualified expenses. Upon experiencing a qualifying event, is she entitled to stop contributions to the FSA? Does it matter if the qualifying event is employer initiated (the employer changes health insurance) or personal (marriage, birth, death, divorce, etc.)?

[Bob R]

It depends on the terms of the plan. Some plans don't permit a change in the health FSA election due to a change in status -- for this exact reason. Others allow an increase in the election but no decrease (i.e., you can't elect to decrease the election to $0 in your example).

[papogi]

Any mid-year change to an election needs to be consistent with the change in status/eligibility/benefits. For example, someone having a baby could increase an FSA election or start an FSA. Having a baby would not be an event to decrease or cease and FSA. Even if a plan is written to only allow decreases upon status changes (never seen such a plan, but would be entirely allowed), having a baby would not be an event which would allow you to use that plan provision. Section 125 rules, unlike COBRA rules, are not minimum requirements. They are maximum requirements, and a plan cannot be more generous. If the IRS consistency rules are not satisfied, the plan can’t override that fact.

Status changes aside, if the employer stops a 125 plan and starts a new one mid-year, and has everyone come up with new elections, then yes, employees who have cleared out their accounts could stop their accounts mid-year and stiff their employer. Depending upon the nature of the change to the health plan, it’s possible that the employer should not have opened up the doors so widely here. You say they “changed its health plan.” What exactly was the change? Adding a new option, a new network?

[Guest jrodgers32]

The municipality will contract with Cigna rather than BCBS. The coverage will be cheaper for the municipality, and there are corresponding increases in cost for participants--copays, employee share of premium, perhaps others.

[papogi]

Tres Reg 1.125-4(f) deals with significant cost changes and coverage changes (reduction of benefits and decrease in number of available physicians). These rules apply to pre-tax elections to fund health benefits, but FSAs are specifically exempt from these provisions. No FSA changes should be allowed, increases or decreases.

[Guest jrodgers32]

Papogi, I think you've hit upon the heart of the matter. I read 1.125 over several times and landed on that too, as did a particularly smart colleague of mine. Any concurrences or disagreements?

Thank you both for your help, by the way.