California recently passed a law that requires employers to provide notice to their California employees enrolled in an employer-sponsored flexible spending account (FSA) of any deadline to withdraw funds before the end of the plan year.
Beginning in 2020, employers are required to:
- notify California employees who participate in an FSA of any deadline to withdraw funds before the end of the plan year; and
- provide notice in two different forms, one of which may be electronic.
If employees do not use the money in their FSA account during the plan year, the funds are forfeited back to the employer (referred to the use-it-or-lose-it rule). California lawmakers were concerned that employers would be less incentivized to remind employees of the use-it-or-lose-it rule because employers could use these funds to offset administrative costs. In response, California passed Assembly Bill No. 1554, which requires employers to provide an additional notice of FSA deadlines to employees.
What notice do employers need to send?
Employers must notify California employees who participate in FSAs of any deadline to withdraw funds before the end of the plan year. This means that employers should notify these employees of their deadline to use funds prior to any termination of employment and any other withdrawal deadline prior to the end of the plan year under the terms of the FSA.
Employers should already be notifying FSA participants of their deadline to withdraw funds when distributing the required FSA Summary Plan Description (SPD) to participants (which is sometimes done by an employer’s FSA vendor). The new law requires a second notice to California FSA participants and that it be provided in a particular format.
Who do employers need to send the notice to?
Employers must notify California employees who participate in FSAs, including dependent care FSAs, health FSAs, and adoption assistance FSAs that require the withdrawal of funds prior to the end of the plan year.
How can employers provide the notice?
Employers must provide notice to employees in two different forms, one of which may be electronic. Notices may be provided (but are not limited to) by the following methods:
- Electronic mail communication;
- Telephone communication;
- Text message notification;
- Postal mail notification; or
- In-person notification.
If employers are already distributing an FSA SPD through email, employers can satisfy the second notice requirement by notifying employees in person, through a phone call, or by mail. Employers may want to check with their FSA vendor to see how they currently notify their FSA participants of withdrawal deadlines to determine what other forms of notice can be performed. FSA vendors may also provide assistance with the second notice requirement. Some options employers may want to consider could include providing in person written notice in open enrollment materials or in a terminating employee’s off-boarding paperwork.
Are there penalties for not providing the notice?
The bill does not include any specific penalties for employers who fail to provide the notice.
Employer Action Items:
- Employers with California employees enrolled in an FSA should notify employees, by two means of communication, if they are required to withdraw funds prior to the end of the plan year.
- Employers may want to contact their FSA vendor to determine the best avenue for complying with this additional notice requirement.
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