California Cares . . . About Employees Losing Flexible Spending Account (“FSA”) Funds
California recently approved Assembly Bill 1554, adding a flexible spending account notice requirement to § 2810.7 of the California Labor Code. The new law, which takes effect January 1, 2020, states:
(a) An employer shall notify an employee who participates in a flexible spending account, including, but not limited to, a dependent care flexible spending account, a health flexible spending account, or adoption assistance flexible spending account, of any deadline to withdraw funds before the end of the plan year. Notice shall be by two different forms, one of which may be electronic.
(b) Notices made pursuant to subdivision (a) may include, but are not limited to the following: (1) Electronic mail communication. (2) Telephone communication. (3) Text message notification. (4) Postal mail notification. (5) In-person notification.
ERISA Preemption
ERISA likely preempts the new law as it applies to health FSAs, most of which are subject to ERISA. However, the law applies to plans that are not subject to ERISA including dependent care FSAs, adoption assistance FSAs, government FSAs and church FSAs.
Many employers sponsor both health FSAs and dependent care FSAs. For such employers it may be easier to comply with the law for both plans rather than asserting ERISA preemption for the health FSA. In addition, reminding employees about reimbursement deadlines for FSAs is a helpful administrative practice.
Compliance
The law requires employers to:
- notify California employees that participate in an FSA;
- using two different forms of communication, only one of which can be an electronic form;
- of any deadline to withdraw funds before the end of the plan year .
That italicized language is important. The new notice requirement only applies to FSAs that require employees to submit claims for reimbursement before the end of the plan year. Many FSAs have claims run out periods that end 60 or 90 days following the end of the plan year. Such plans do not appear to be subject to the new law.
However, some FSAs accelerate the claims run out period when employees terminate employment or otherwise stop participating. The new law can also be triggered when an employer terminates an FSA mid-year, as sometimes happens in mergers or acquisitions, and requires claims to be submitted within a short period of time following the termination date. Plans with such provisions, depending on timing, could also be subject to the new law.
Two Notices
At least two notices are required, one of which must be provided non-electronically. The law provides a list of five acceptable forms of communication but does not limit notices to these forms.
The law does not address when and how often notices should be sent. The law also does not specify whether notices must be provided as standalone notices or if they may be included in existing documents, such as open enrollment materials or a summary plan description. Until further guidance is issued, this lack of specificity provides employers some flexibility in deciding when and how to provide notice. Again, whatever delivery method is chosen, employers must ensure at least one notice reaches participants in person or paper.
The notices must only be given to California employees participating in FSAs, but some employers may conclude it is preferable to provide one, or both, notices to all employees rather than only California employees who participate.
Possible Compliance Strategy
One possible compliance strategy would be to include a reminder in open enrollment materials about any mid-year claim reimbursement deadlines. That serves as a good reminder for employees, when they make FSA enrollment decisions for the upcoming plan year, that in some instances, such as termination of employment, they may not have the full regular run out period to submit claims. Another appropriate time to give notice is when an employee experiences an event that triggers an accelerated claims deadline. For example, if an employee terminates employment and must submit claims within 60 days, exit correspondence might include a reminder about the accelerated claims deadline.
Conclusion
With the January 1, 2020 effective date approaching, employers should review their FSA plans and determine whether the plan, in any circumstance, requires employees to submit claims for reimbursement before the end of the plan year. For plans that do, employers may either comply with the new notice requirement or amend the plan to adjust the claims run out period so it ends after the end of the plan year.
