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.
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.