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FSA withdrawal deadlines

A new California law imposes another notice mandate on employers with employees in California. The law will require employers, beginning in 2020, to notify their flexible spending account (FSA) enrollees – via two different modes of communication – about any deadline to withdraw funds from the FSA (health, dependent care or adoption assistance) where that deadline is prior to the end of the plan year.

The law appears to target FSAs requiring employees who terminate employment or otherwise lose FSA eligibility during the plan year to submit claims before the end of the plan year, say, with in 30 or 90 days of employment termination. It expressly refers to “any deadline to withdraw funds before the end of the plan year.” Most FSAs allow for an extended, often three-month, claims submission period after the close of the plan year, at least for active employees.

Lockton comment: Interestingly, the original version of the bill was concerned only with dependent care FSAs. The original bill was changed late in the legislative process to broaden its application to other FSAs.

The law states that notice “shall be by two different forms, one of which may be electronic,” and then provides a non-exclusive list of modes of communication, including email, telephone, text message, postal mail and in-person communication. While written notice provided to FSA enrollees in a plan document, benefits guide or hard-copy annual notice packet would presumably satisfy one mode of communication, the employer will need to again communicate any pre-plan-year-end withdrawal deadline in some other way, such as email, text, telephone call or in-person communication.

Lockton comment: ERISA likely preempts the law with respect to health FSAs sponsored by ERISA employers. The Department of Labor has long taken the position that ERISA preempts state-imposed notice obligations that affect an employer’s administration of its ERISA plans, and a health FSA maintained by an ERISA employer is an ERISA plan. However, a dependent care or adoption assistance FSA is not an ERISA plan, and thus subject to state notice mandates.

What is the impact of failing to provide the notice?

The law itself does not set out a specific penalty for failure to provide the notice. Presumably the largest potential downside will be an employee who later asks for a refund of unspent and forfeited funds if the appropriate notice was not provided. Employers in that situation will be between something of a rock and a hard place. The intuitive answer for the employer will be to provide a taxable bonus to the employee equal to the unspent (and forfeited) balance, but federal tax law frowns on cashing out to employees their unspent funds.

Employers who intend to comply with the requirement should do two things:

  • Determine whether, for any non-ERISA FSAs it maintains, the FSAs impose a deadline for withdrawal of funds prior to the end of the plan year, particularly for employees who terminate employment or lose FSA eligibility mid-year.
  • If so, either amend the FSAs to allow for additional time, after the close of the plan year, to submit reimbursement requests, or ensure the required notice is provided in two different ways. One easy way is to provide written notice in a plan document or benefits guide supplied to the employee, either via mail or electronically, but the employer will want to add a second notice via some other means, such as postal mail, email, text or in-person communication, perhaps as part of an out-processing briefing or termination interview.