Change in status

[Guest ndgal]

A plan participant elects to defer $100 per month in a calendar year FSA. As of May 31, the participant has incurred $1500 in expenses and has requested reimbursement for $1200 as allowed under the plan (he is out $300). The participant and his wife have a baby in July and wish to increase their deferrals under the change in status rules. The participant would also like the increase his deferrals to help defray the $300 he previously could not claim. Are there any regulations that would prohibit him from doing so? In other words, can a participant revise his deferral estimate to account for expenses incurred prior to the date of his change in status?

[Lisa Hand]

The birth of the child is a valid change of status event to change the medical FSA. Expenses incurred while a participant in the plan are eligible as long as they are incurred during the plan year, up to the annual amount elected by the participant.

[Kirk Maldonado]

Lisa:

While your answer is an accurate statement of the law, I think that it misses the subtle nuance of the question.

While I don't think that there is anything on point, it could be argued that the increase in the contribution by the participant can only affect expenses incurred after the date of the new election. Otherwise, in effect, the participant is retroactively changing his or her election, which is not permissible.

However, I will freely concede that this point is far from clear.

[KIP KRAUS]

Wow!! I can’t believe I agree with Kirk on this one. I don’t see how a person can use up all of his original salary deferral in the first half of the plan year and then increase his deferral in the middle of the year and have claims prior to the new deferral be eligible for reimbursement. I would argue that the new deferral based on the birth of a child has no relationship to the original deferral. I addition, as Kirk says, wanting to include claims prior to the new deferral election would be retroactively making an election change.

You may even be able to think of it in this way. Suppose an employer elected to add vision care coverage to its medical plan in mid-year. Claims for vision care would only be covered as incurred from that date forward. Any vision care expenses incurred prior to that date would not be retroactively covered unless the insurer or employer didn’t follow reasonable underwriting procedures.

[Kirk Maldonado]

Wow! I can't believe Kip agrees with me either!

I think his analogy to adding a new benefit part way through the year brings the issue clearly into focus.