Mid-Year DCAP or Health FSA Election Changes: How Often and Under What Circumstances

The IRS’ increased flexibility permitting plan sponsors to allow health FSA and DCAP participants to make mid-year election changes during calendar year 2020 without experiencing a status change has prompted confusion regarding the circumstances in which employees may normally change their dependent care assistance plan (DCAP) and health FSA elections during the middle of a plan year. To aid our consultants and clients in understanding when these changes can be made, we have summarized the rules that allow employees to make mid-year changes to health FSA and DCAP elections on account of status change events (and, in the case of DCAPs, cost change events). While other exceptions allowing mid-year election changes to health FSAs and DCAPs exist, including exceptions related to HIPAA special enrollment, Medicare/Medicaid, FMLA leaves, and other coverage changes, we are focusing on the status change and cost change based exceptions in this article. We also have provided examples (with commentary) regarding scenarios we have been previously asked about.

Overview

In general, mid-year election changes to DCAPs or health FSAs are not allowed under cafeteria plan rules with the exception of certain enumerated circumstances. As mentioned above, here we will be discussing exceptions based on employee status changes and cost changes (the latter applying to DCAP elections only).

Despite this general rule, the IRS has allowed temporary flexibility to the rules for mid-year changes to health FSA and DCAP elections during 2020, due to the COVID-19 pandemic. Its guidance granting this flexibility allows employers to amend  their plans to allow employees to change their elections for health FSAs and DCAPs without a corresponding change in status or cost. This temporary flexibility is an optional rule, rather than a requirement for plan sponsors.

It is important to note here that the IRS guidance did not alter the rules applying to change in status- and cost-based mid-year election change requests. Thus, when an employee experiences a change in status (or cost, in the case of DCAPs) they may still make a mid-year election change, so long as the request comports with the basic rules– namely they experienced one of the prescribed events and their requested election change is consistent with said event.

It is also important to stress that employees may make a mid-year election change even if they have already made a mid-year change in response to an employer’s adoption of the IRS’ COVID-19-related flexibility rules, or another change-in-status event. Thus, employees may make multiple requests for an election change. However, each request must be based on an appropriate change in status event and each request needs to be reviewed for consistency based on said event.

Change in Status Rules

The basic status change rule allowing for mid-year election changes can be described as follows:

 An employee may make a mid-year election change to their DCAP or health FSA on account of a change in status if:

1) the employee experienced one of the enumerated status change events and this has affected their eligibility under their employer’s plan in some fashion; and

2) their requested election change is on account of, and consistent, with said event. 

DCAP mid-year election change may also be made if it is on account of and corresponds with a change in status affecting eligibility of dependent care expenses.

Change in Status Events

The following comprise the four groups of status-related events that may allow for a mid-year election change:

Change in Marital Status
Including marriage, divorce, death of a spouse, annulment, etc.

Change in Number of Dependents
Including through birth, adoption, death, divorce, and placement for adoption.

Change in Employment Status
Including commencement or return from an unpaid leave of absence, commencement/termination of employment, a strike or lockout, a change in worksite, and a change in employment status affecting benefit eligibility (e.g. moving from part-time to full-time and vice versa), for a covered employee, employee’s spouse, or dependent.

Dependent Satisfies or Ceases to Satisfy Eligibility Requirements
Events that change dependents’ ability to satisfy eligibility requirements for coverage (e.g. attainment of age or student status).

Remember, as mentioned above and illustrated below, the requested change based on one of the events must also be consistent with that event in order for the mid-year election change request to be allowed under the rules.

DCAP Cost Change

An employer may also allow employees to change DCAP (but not health FSA) elections mid-year on account of and corresponding to a change in the cost of coverage. Mid-year election changes allowed on the basis of a change in costs of care are quite liberal and include situations when there is an increase or reduction in hours needed for childcare, when a child switches paid providers (where there is a difference in costs), when a child switches from a paid provider to a free one or a no provider situation (i.e. “latchkey” children) ), and when a provider (other than a relative) increases the amount it charges for care.

Points to Remember:

  • If an employee experiences a change in status (or cost, in the case of DCAPs) they may make a mid-year election change if the requested change comports with the basic rules– namely they experienced one of the prescribed status change events and their requested election change is consistent with said event.
    • This is true regardless of whether an employer adopted the IRS’ COVID-19 related mid-year election rules or not.
  • Employees may make multiple mid-year election change requests per year, so long as they experience one of the status change events and their requested change is consistent with the event type.

Make sure to do a consistency analysis for each request. Sometimes a change that does not necessarily seem consistent with an event, may actually be.


This document is provided for general information purposes only and should not be considered legal or tax advice or legal or tax opinion on any specific facts or circumstances. Readers are urged to consult their legal counsel and tax advisor concerning any legal or tax questions that may arise.


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