Opt Out, Flex Credits, and Change in Status

[Chaz]

Here is an interesting one that I have not seen any guidance on:

Employer's cafeteria plan provides for $X credit to FSA feature if employee opts out of medical coverage. Say employee uses all of the $X on day 1 of the plan year. Then, at some point, a qualified status change occurs (e.g., the employee's spouse loses coverage) allowing the employee to make an election change. The employee elects medical coverage under the employers plan (which if the employee had done so during open enrollment would have disqualified him from receiving the credit to the FSA). Is the employer out of luck with respect to the $X reimbursed? What if the employee only used a portion of the $X? Is the employee entitled to use the balance over the remainder of the Plan Year?

Any thoughts would be appreciated. . . .

[QDROphile]

The plan does not have to allow the employee to make changes even if the law allows, so the issue can be avoided if the employer chooses, or managed according to what the employer wants to accomplish. If you are asking about what to do at this moment, follow the plan terms.

[Chaz]

The plan does not have to allow the employee to make changes even if the law allows, so the issue can be avoided if the employer chooses, or managed according to what the employer wants to accomplish. If you are asking about what to do at this moment, follow the plan terms.

The plan provides for election changes upon a qualified change in status and we are going to allow the change in accordance therewith. My question deals with what happens to the FSA account.

[J Simmons]

Unless your plan document specifies otherwise for this type of situation, I would think you'd treat the FSA when the employee makes the change in status election over to the medical coverage as you would, under plan provisions, the FSA of an employee that quits in the middle of the year.

If your plan would call for the continuation of the FSA (and a former employee's payment of the costs) until the end of the year in which he or she quits, you could (if you desire) establish here and then follow in the future an administrative practice that does not call for a continuation. The reasons would be (a) the continuation rules only apply to those that quit, and (b) the plan spells out clearly a policy forbidding co-terminous FSA and medical coverage.

Whichever path you choose in the absence of plan provisions dealing with this type of situation, you should follow the precedence in the future with other, similarly situated employees making the mid-year change from FSA to medical coverage incident to a change in family status.