Under Section 125 of the Internal Revenue Code, when an employee elects to participate in a Flexible Spending Account (FSA)—whether for healthcare or dependent care—they must decide how much to contribute for the upcoming plan year before that year begins. Once made, this election is irrevocable for the entire plan year, meaning the employee cannot change the contribution amount or cancel participation until the next open enrollment period.
However, there are specific circumstances under which an employee may be allowed to change their FSA election mid-year. These exceptions are known as permitted election change events and include:
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Change in Employment Status: Such as a transition from full-time to part-time work, or a leave of absence.
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Marital Status Changes: Including marriage, divorce, legal separation, or the death of a spouse.
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Number of Dependents: Events like the birth or adoption of a child, or if a dependent passes away.
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Dependent Eligibility: If a dependent becomes eligible or ineligible for coverage due to age, student status, or other factors.
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Judgments or Court Orders: Such as those pertaining to child support or custody arrangements.
It’s important to note that not all life events qualify for a mid-year election change. Additionally, employers are not required to allow mid-year changes, even for permitted events, unless their specific cafeteria plan documents include provisions for such adjustments.
Therefore, employees should thoroughly review their employer’s plan details and consider their anticipated healthcare and dependent care expenses carefully when making FSA elections during open enrollment.
Understanding the Irrevocable Election Rule is crucial for effective FSA planning and avoiding potential financial inconveniences.