QUESTION: One of our employees elected to contribute $2,500 to his health FSA for 2020 to cover the expense of anticipated elective surgery. Due to the COVID-19 pandemic, the surgery has been postponed indefinitely, and the employee would like to reduce his health FSA election for the rest of the year to save money. Can we allow him to make this change?
ANSWER: Yes, employers may amend their plans to allow employees to change their health FSA elections under these circumstances. Health FSA elections are generally irrevocable during a plan year unless an event occurs that fits within one of the exceptions available under applicable regulations or other IRS guidance. A change in the availability of medical services does not fall within the allowable exceptions-nor does a change in financial circumstances, such as your employee’s desire to save money. However, IRS Notice 2020-29 provides increased flexibility regarding midyear elections during calendar year 2020. The notice states that plans may be amended to allow several types of prospective cafeteria plan election changes during 2020, including an election to prospectively decrease a participant’s health FSA contribution amount.
To take advantage of this election change flexibility, you will need to amend your plan accordingly, on or before December 31, 2021. You may also wish to consider amending your plan to allow health FSA carryovers or to adopt a grace period (also addressed in IRS Notice 2020-29 ), which would give employees extra time to use up remaining funds.