New California Law Requires Year-End Account Balance Notices For Flexible Spending Account Plans – Action Items

The California Legislature recently passed Assembly Bill 1554, adding to the required notices that employers must deliver to participants in Flexible Spending Account (FSA) plans, including health, dependent care, and adoption assistance plans. The new law, signed on August 31, 2019 and becoming effective on January 1, 2020, provides that all employers sponsoring FSA plans must provide notice to participants of deadlines to withdraw funds. Notice must be given to each participant twice prior to the plan year's end and in different forms.

Action items

For health FSAs: As described below, there is a strong possibility that the new law requiring notices to participants in health FSA plans is preempted by federal law, rendering the new law inapplicable in that respect. However, employers may want to consider complying until the federal courts make a final ruling because the law is relatively easy to comply with and is helpful for employees. For dependent care and adoption assistant FSAs: Dependent care and adoption assistance FSAs likely are subject to this new law because preemptive federal law does not apply to these plans generally. We recommend employers become familiar with the new law and implement administrative processes to deliver notices to participants in 2020. BACKGROUND ON FSA DEADLINES

The use-it-or-lose-it rule

Most employers will already be familiar with the use-it-or-lose-it rule for FSA plans. Under the Proposed Treasury Regulations to Section 125 of the Internal Revenue Code, the funds available to participants in an FSA expire on an annual basis, the “use-it-or-lose-it rule.” This hard deadline is subject only to a run-out period during which claims incurred in the previous year may be reported. For calendar year plans, the run-out period lasts through March 15 of the next year. After this period, the participants' FSA funds are forfeited.

Ways to navigate the use-it-or-lose-it rule

Carryover (for health FSAs only)

To address the forfeiture of funds, the IRS issued Notice 2013-71 that provides that health FSAs may permit up to $500 to be carried forward annually, without expiration. However, this guidance applies only to health FSAs. Accordingly, dependent care and adoption assistance FSAs require a separate approach to FSA forfeitures.1

Grace period (for any FSA)

Another typical method to address FSA forfeitures is to provide participants with a grace period. Unlike carryovers, which apply exclusively to health FSAs, all...

To continue reading

Request your trial

VLEX uses login cookies to provide you with a better browsing experience. If you click on 'Accept' or continue browsing this site we consider that you accept our cookie policy. ACCEPT