Employers in need of reporting injuries to OSHA are quickly approaching an important date  – March 2, 2020. Download our Occupational Health & Safety Bulletin for detailed information and helpful links to ensure your company stays in compliance.

Deadline for Electronic Reporting of OSHA 300A Data

During a recent fireside chat with NewHER, Newfront’s employee resource group, which aims to play an active role in creating a more equitable and inclusive environment for all women, Board Member Courtney Leimkuhler shared a stunning statistic: “75% of the workforce identifies as caregivers.” That means three-quarters of workers feel responsible for someone — an elderly parent, a struggling relative, a child — at home.

Leimkuhler, appointed to the Newfront board in July, shared the statistic to illustrate that creating structure within an office to support caregivers is much bigger than a “women’s issue.” For Leimkuhler, an essential step in creating an equitable workplace is not perpetuating the idea that caregiving is women’s work. “I don’t like to say that it’s women’s work; rather, let’s work to normalize that it’s everyone’s work,” she said. “The thing that is difficult is not that I’m a woman, but that I have a working spouse. I think that we conflate those things.” 

The issue is close to Leimkuhler’s heart. She spent decades in the male-dominated world of finance — starting at Goldman Sachs before spending a decade at the New York Stock Exchange, working as the Head of Corporate Strategy and Mergers and Acquisitions. She then served as the CFO of Marsh before cofounding Springbank Collective, a venture fund investing in the infrastructure to close the gender gap. At Springbank, she’s focused on investing in solutions to make workplaces more equitable for caregivers. “There is a lot of logistical tension that’s uniquely born by caregivers,” she said. “So, instead of just backing female founders, I was more interested in how you build solutions that impact lots and lots of women.”

On the Newfront Board of Directors, Leimkuhler plans to use a “noses in, fingers out” approach — be nosy and ask tough questions to management but stay out of day-to-day operations. But she says she knows that she, the rest of the board, and every employee can work to be a change agent for Newfront. “We have to always be thinking about what company we’re trying to build, whether that’s when looking at org charts and making decisions or just in how we do things around here, how we interact with each other on a daily basis,” she said.

More than a women’s issue: men’s critical role

Creating an equitable workforce isn’t just a women’s issue. It takes everyone having the situation awareness to continually ask, “What is not being said in this room or who is not being represented in this room?” That’s just the first step, but it’s an essential one, according to Leimkuhler.

Starting out in finance meant that Leimkuhler had a lot of men who became her mentors and sponsors as she rose through the ranks. But she’s realistic about why that happened for her. “We have to be clear-eyed about everyone’s, including our own, personal motivation here, and figuring out how to put people in alignment and not just be banking on altruism or paying it forward. That is an important component of building organizational culture, but I think if we’re really talking about sponsorship, it’s got to come from a place of business advancement,” she said. “The truth is, the folks who sponsored me did it in part because I was able to be really helpful to them as well. If I had to be ruthless about it, part of the reason I had a great sponsor was that I made my sponsor look really good.”

But the reality is, women do tend to find themselves placed in the role of both employee and caregiver while in the office. It’s a constant challenge to know which interpersonal tasks constitute being a good teammate and which are an unfair extra burden on women employees. How do you avoid being pushed into the dual role of caregiver/employee? “It’s a balance between being a team member who just gets shit done and standing up for yourself when it’s not your responsibility,” she said. “Do things when they’re needed but don’t fall into the role every time.”   

Caregivers move through their workday with an extra load on their plate. But through her venture fund and her position on the Newfront board, Leimkuhler is working to create the infrastructure to support the employees who support so many others at work and at home. “We can do this. It’s not that hard,” she said. “We can fix this.”

Newfront Board Member Courtney Leimkuhler Speaks on Creating Equitable Workplaces for Caregivers

Newfront Board Member Courtney Leimkuhler spoke to team members last month during an event by NewHER, an employee resource group focused on creating a more equitable and inclusive environment for all women.

Question: How can employers design their health plan with different strategies for certain classes of employees?

Short Answer: Employers taking a class-based health plan design approach should ensure the class distinctions are a) clearly communicated to employees in any plan materials addressing eligibility, b) approved by the insurance carriers and/or stop-loss providers, and c) designed to comply with any applicable nondiscrimination rules.

Employers often will seek to offer different plan benefits or design different contribution strategies for certain classes of employees based on a variety of factors.  

Common classes for whom employers may consider having different health benefit strategies include:

Common health plan distinctions for such classes include:

Limiting health plan options to specific classes

Dependent eligibility differences by class

Employers seeking any of these class-based health plan design approaches should address three main issues:

Clearly Communicate Class Distinctions in Plan Materials;

Confirm Class Distinctions with Insurance Carriers/Stop-Loss; and

Structure the Approach to Comply with Applicable Nondiscrimination Rules.

Issue #1: Clearly Communicate Class Distinctions in Plan Materials

ERISA requires that employers administer and maintain the plan pursuant to its written terms, including its eligibility requirements.  Any class-based approach to the plan’s eligibility terms would need to be clearly communicated to employees in any plan materials addressing eligibility (e.g., SPD, EOC, COC policy, certificate, open enrollment materials, new hire materials, handbook).

Clear written terms addressing these class distinctions will minimize the possibility of a potential claim for ERISA breach of fiduciary duty or claim for benefits by an employee who purports to have access to the benefits offered to another class of employees.

For more details: Newfront ERISA for Employers Guide

Issue #2: Confirm Class Distinctions in With Insurance Carriers/Stop-Loss

Insurance carriers (and stop-loss providers for self-insured plans) generally reserve the right to approve any class-based benefit distinctions.  These carrier restrictions are designed to avoid potential adverse selection issues in the employer’s class-based plan design.

If an insurance carrier or stop-loss provider were to discover that an employer structured plan benefits by class in an unapproved manner, the carrier could be within its right to deny paying (or reverse payment for) claims. That could ultimately likely make the employer responsible for self-funding claims incurred—which is a worst-case scenario of potentially unlimited liability that employers must avoid.

Accordingly, it is crucial that the insurance carrier (or stop-loss provider) agree to the employer’s class-based plan design.

For more details: Addressing Employee Health Plan Exception Requests (Ten-Part Series)

Issue #3: Structure the Approach to Comply with Applicable Nondiscrimination Rules

Health plan nondiscrimination rules are designed to prevent employers from offering tax-advantaged benefits (such as health coverage) in a manner that discriminates in favor of employees who are highly compensated.  While that basic intent is straightforward enough, the actual application of nondiscrimination limitations can in some situations be quite complex.

The primary nondiscrimination issues for employers seeking to distinguish health plan benefits by class will differ based on whether the health plan is self-insured (including level-funded) or fully insured.  All employers will generally face the same set of nondiscrimination considerations when considering whether to have different plan contribution strategies by class.

All Plans: Class-Based Contribution Strategies—Section 125 Nondiscrimination Rules

Employers often do not have the ability to devise a separate contribution structure for specific classes (e.g., as a cost-cutting strategy) because of the Section 125 nondiscrimination rules.

The Section 125 cafeteria plan rules govern employee pre-tax contributions to the health plan.  Those rules are designed to (among other things) ensure that contributions and benefits are available on a nondiscriminatory basis for highly compensated participants (HCPs) and non-HCPs.  

A more-than-5% owner of the employer in the current or preceding year; or

For 2023, an employee who earned in excess of $135,000 in the prior year.

The key component of these rules for this purpose is the “uniform election” requirement.  That provision requires that employers provide a “uniform election with respect to employer contributions.”

A contribution structure that charges more to certain non-HCPs for the same benefit generally does not provide a “uniform election with respect to employer contributions”.  This means full-time non-HCP employees eligible for the same plan option as an HCP generally must be offered at least the same employer contribution amount that is available to HCPs for that same plan option.

Furthermore, in almost all cases the same Section 125 nondiscrimination rules apply to employer HSA contributions.  This means that employers will generally have to make the same employer HSA contribution amount available to full-time non-HCPs enrolled in the HDHP plan option as made available to any HCPs.  

Geographic Location-Based Contribution Classes Permitted: 

The general rule described above applies to “similarly situated participants.”  In other words, the employer cannot provide a greater contribution for any HCP than any non-HCPs who are “similarly situated participants” eligible for the same plan option.  This means that the employer is permitted to provide a greater contribution to certain employees (even if some of them are HCPs) as long as any non-HCPs participating in the same plan option and receiving the lower employer contribution rate are not “similarly situated.”

The definition of “similarly situated” permits the employer to categorize employee groups based on reasonable differences in plan benefits.  The primary example of a reasonable difference in the rules is employees in different geographical locations.  Employers may therefore have different contribution structures for different employee classes by region. 

Nondiscrimination Rules for Different Health Plan Contribution Structures

Newfront Section 125 Cafeteria Plan Guide

Self-Insured Plans: Class-Based Plan Design—Section 105(h) Nondiscrimination Rules

The §105(h) nondiscrimination rules are designed to prevent discrimination in favor of highly compensated individuals (HCIs) under a self-funded health plan. The §105(h) rules define HCIs differently from the §125 cafeteria plan HCP definition.

One of the top five highest-paid officers;

A shareholder who owns more than 10% of the value of stock; or

Among the highest-paid 25% of all employees.

There are three main components of the §105(h) non-discrimination rules:

1. 105(h) Nondiscrimination: Eligibility Test

The §105 rules provide that a plan will satisfy the eligibility components of the test only if the plan does not discriminate in favor of HCIs as to eligibility to participate.  Accordingly, for purposes of eligibility, a self-insured health plan can exclude or provide different eligibility terms for classes of employees only if the classification is “reasonable and nondiscriminatory”.  

Hourly vs. Salaried and Geographic Location-Based Eligibility Classes Permitted:

The definition of “reasonable and nondiscriminatory” in the rules specifically refers to distinctions based on the nature of compensation, such as hourly vs. salaried, and geographic location.  Therefore, it will generally not be an issue for the employer to provide different self-insured health plan eligibility terms to employees based on these classes.

2. 105(h) Nondiscrimination: Benefits Test

The benefits test component of §105(h) requires that all benefits provided to eligible HCIs under the plan also be available to all eligible non-HCIs.  Under a single plan testing approach, creating different classes of benefits for eligible employees would be a problem because it would result in non-HCIs in the lower tier benefit class not receiving the richer benefits available to HCIs in the higher class.

For example, take an employer that designs a richer health plan option for Class A, and a lower tier plan option for Class B.  This would be problematic under a single plan testing approach because the plan would not provide non-HCIs in Class B the same benefits as those available to HCIs in Class A.

Disaggregation Through Plan Design Permitted:

The §105(h) rules allow employers to disaggregate the self-insured health plan into two or more separate plans for nondiscrimination testing purposes. Therefore, employers can specify in the plan document that the different benefit arrangements are to be considered separate plans—even if they are included in a single plan document. That will permit each group to separately pass the Benefits Test.

The following is a template self-insured plan document provision for this purpose:

“Pursuant to the ‘Multiple plans’ provisions set forth in Treas. Reg. §1.105-11(c)(4), each coverage level, each group of Employees covered by the Plan, and each class of benefits provided under the Plan constitute a separate ‘plan’ for purposes of the Internal Revenue Code Section 105(h) nondiscrimination requirements and any other applicable law.”

3. 105(h) Nondiscrimination: Operational Discrimination

Finally, the §105(h) rules include an umbrella provision preventing self-insured health plans from discriminating against non-HCIs in operation.  Whether a plan is operationally discriminatory is a facts and circumstances test based on each plan’s specific arrangement.

The limited guidance available for this component of the rule suggests it would rarely become an issue in class-based self-insured health plan design.  For example, a plan is not considered discriminatory merely because HCIs participating in the plan utilize plan benefits to a greater extent than non-HCIs.

Avoid Plan Amendments Targeted to Benefit HCIs:

The IRS’s main concern with this requirement appears to be that the employer does not selectively establish, amend, or terminate the plan in a manner designed to benefit HCIs.  For example, an employer would act in a manner that is operationally discriminatory if it amended the plan’s benefits to cover an HCI’s specific condition, then removed that benefit enhancement upon the HCI no longer needing it or a non-HCI expressing interest in the same benefits.

Failing the Section 105(h) Nondiscrimination Requirements

If the IRS were to audit a self-insured health plan and find its arrangement to be discriminatory under §105(h), HCIs would be taxed on all or a portion of the benefits they received under the plan, referred to as the “excess reimbursement.” This could be a significant tax liability depending on the amount and cost of services actually received by the HCIs.

For more details: Newfront Compliance Considerations for Self-Insured Plans Guide.

Fully Insured Plans: Class-Based Plan Design—No Nondiscrimination Rules in Effect

At this point, the only significant remaining ACA item yet to take effect is the fully insured plan nondiscrimination rules.  The ACA added Public Health Service Act §2716, which provides that insured group health plans will be subject to rules “similar to” the nondiscrimination requirements that have long applied to self-insured plans under Internal Revenue Code §105(h) (as described above).  The §2716 insured plan rules technically were to apply at the same time as the first wave of the ACA market reforms, which was the first plan year beginning on or after September 23, 2010.

However, the IRS issued Notice 2011-1 at the end of 2010 providing that employers are not required to comply with the new §2716 nondiscrimination rules for insured plans until the Departments issue regulations or other administrative guidance.  The DOL and HHS indicated their agreement with the IRS to delay enforcement.  The Notice further states that any such guidance will not apply until plan years beginning a specified period after issuance (e.g., it may not apply until the first plan year beginning on or after six months following the regulatory issuance date).

Employers enjoy much greater flexibility with respect to class-based plan design where the health plan is fully insured.  However, employers should keep in mind that a) the Section 125 cafeteria plan rules will still govern any contribution-based class design approach (even for fully insured plans), and b) any class-based plan design may need to be reviewed again at a future date if the ACA fully insured plan nondiscrimination rules take effect.

Employers seeking to establish a class-based health plan design approach need to confirm the approach with the plan’s insurance carriers and/or stop-loss providers.  

Any such class-based designed will also need to comply with the core nondiscrimination limitations:

Class-Based Contribution Strategies for All Plans: The Section 125 cafeteria plan rules generally prohibit providing any HCEs ($135k+ in 2023) a larger employer contribution for the same plan option for which a non-HCE is eligible.  In other words, if both HCEs and non-HCEs are eligible for the same plan option, the employer contribution (including employer HSA contributions) generally must be at least as generous as for non-HCEs.  Regional differences are permitted.

Class-Based Plan Design for Self-Insured Plans: Self-insured plans need to also comply with the §105(h) nondiscrimination rules.  Those rules impose restrictions on plan design based on eligibility, benefits, and operational nondiscrimination.  Different eligibility terms for employee classes are permitted if the classification is reasonable and nondiscriminatory, which includes hourly vs. salaried and regional classes.

Class-Based Plan Design for Fully Insured Plans: No additional nondiscrimination rules are currently in effect for fully insured plan designs.  However, employers should be aware that the ACA added new §2716 nondiscrimination rules for fully insured plans that that could take effect pending future IRS guidance—and if so, those rules will be “similar to” the §105(h) nondiscrimination rules.

 Upon confirming any such class-based health plan design approach does not present any insurance carrier, stop-loss provider, or nondiscrimination concerns, employers should implement the class-based design by clearly communicating the approach to employees in any plan materials addressing eligibility (e.g., SPD, EOC, COC, policy, certificate, open enrollment materials, new hire materials, handbook).

(2) Benefit availability and benefit election. A cafeteria plan does not discriminate with respect to contributions and benefits if either qualified benefits and total benefits, or employer contributions allocable to statutory nontaxable benefits and employer contributions allocable to total benefits, do not discriminate in favor of highly compensated participants. A cafeteria plan must satisfy this paragraph (c) with respect to both benefit availability and benefit utilization. Thus, a plan must give each similarly situated participant a uniform opportunity to elect qualified benefits, and the actual election of qualified benefits through the plan must not be disproportionate by highly compensated participants (while other participants elect permitted taxable benefits)…A plan must also give each similarly situated participant a uniform election with respect to employer contributions, and the actual election with respect to employer contributions for qualified benefits through the plan must not be disproportionate by highly compensated participants (while other participants elect to receive employer contributions as permitted taxable benefits). 

Designing health plans with different strategies for certain classes of employees,

Health Benefits by Class

Designing health plans with different strategies for certain classes of employees.

Wendy Cook, Frannie Epps, and Lauren Pratscher join Newfront from Marsh to further develop sophisticated carrier placement strategies and expand solutions for clients’ unique transactions.

Newfront, the tech-driven insurance brokerage firm based in San Francisco, welcomes three top experts to bolster its carrier placement and casualty strategy. Wendy Cook, Frannie Epps, and Lauren Pratscher join from Marsh, bringing a combined six decades of industry experience in architecting customized solutions for highly complex organizations.

As Head of Insurance Placement, Cook will lead carrier strategies at Newfront, a Top-40 Broker based on revenue. She will also serve as the Regional Managing Director for the Midwest. Epps, Head of Casualty, will oversee the company’s Casualty Practice, with Pratscher as Head of Casualty Placement. 

“Newfront continues to attract high-caliber insurance leaders and advisors, empowering them with a revolutionary technology platform that provides an unprecedented experience,” said Newfront CEO Spike Lipkin. “Newfront has an industry leading reputation in Executive Risk and with the addition of Wendy, Frannie, and Lauren, we have rounded out our placement and advisory capabilities with preeminent casualty talent. Together, these seasoned teams allow Newfront to negotiate the best pricing and comprehensive terms, conditions, and structure for clients.”

Cook brings 30 years of experience in the insurance industry, including several years within the underwriting and P&C sectors. Most recently, Cook was Managing Director and Chicago Office Head at Marsh, where she held a number of executive leadership roles over the past 20 years. She was also the Corporate Segment Leader in Marsh’s North Central Zone, leading one of the largest teams in the Central Zone that performed as the company’s top region. Previously, Cook was a client executive at Willis Towers Watson, as well as a casualty underwriter focused on complex risks. 

“Newfront has a formidable value proposition, combining best-in-class technology and insurance professionals,” said Cook. “I’m looking forward to continuing Newfront’s growth trajectory by strengthening our carrier placement approach with specialized, dedicated resources. I’m also excited to open a Chicago office and expand the Midwest with a diverse, industry leading team.”

Epps held leadership positions with increasing responsibility at Marsh for 15 years before joining Newfront. Most recently, she led Marsh’s Casualty Practice for the Central US. Under Epps’s leadership, more than 70 casualty consultants provided strategic program design, coordination of placement and marketing activities, and facilitation of transparent channels of communication between clients and carriers. 

Pratscher brings nearly 20 years of experience to Newfront, including holding various leadership positions within the Casualty Practice at Marsh. For the last five years she served in a dual role as the Corporate Casualty Placement Leader, fostering marketing relationships with key trading partners, and as a Senior Casualty Advisor in the Fortune 500 space. Additionally, her team placed more than $100 million in premiums into the market annually. Prior to Marsh, Pratscher spent several years in the risk management group of a Chicago-based retail real estate investment trust.

To learn more about Newfront, visit: https://www.newfront.com/.

Newfront is transforming the delivery of risk management, employee experience, insurance, and retirement solutions by building the modern insurance platform. Transparent data delivered real-time translates into a lower total cost of risk and greater insights. Newfront makes insurance work for you. Headquartered in San Francisco, Newfront has offices throughout the country and is home to more than 850 employees who serve clients across the United States and globally.

Traci Johnson
Newfront
press@newfront.com 


Natasha Koleas
PAN Communications 
949-397-7582
nkoleas@pancomm.com 

Newfront Introduces Powerhouse Placement and Casualty Team of Seasoned Leaders

Vermont will be joining its neighbor, New Hampshire, in implementing a voluntary paid family leave program as of July 1, 2024.  The program will be referred to as the Vermont Family and Medical Leave Insurance Plan (“VT-FMLI”).  

Similar to the New Hampshire model, Vermont will be contracting with an insurance company (The Hartford) to provide paid family and medical leave benefits on behalf of employers who purchase a policy.  The VT-FMLI model differs from the more prevalent state mandate structure by offering employers an optional approach to paid family and medical leave.  

The intent of this law is to leverage the purchasing power and economies of scale available to the state of Vermont to create an insured paid family and medical leave insurance benefit.  Vermont has chosen The Hartford as their leave administrator.  (New Hampshire is contracting with MetLife for its similar arrangement).

VT-FMLI will be anchored by the State employee workforce beginning July 1, 2023.  Beginning July 1, 2024, private employers and non-state public employers with two or more employees will be able to select from various VT-FMLI options to purchase a policy for their employees.  Beginning July 1, 2025, individual employees and self-employed workers can purchase individual coverage if not offered by their employers.   

For private sector employers, VT-FMLI is optional. Private sector employers with two or more employees that wish to offer a VT-FMLI benefit can purchase a policy (as of July 1, 2024) through The Hartford. 

Employees whose employers choose not to offer VT-FMLI coverage will still have the opportunity (as of July 1, 2025) to purchase coverage through the individual purchasing pool insured by The Hartford.

The law applies to all state employees (as of July 1, 2023) of the state of Vermont.  

What benefits are available to employees?

The VT-FMLI program will roll out to Vermont State employees in July 2023 by providing up to 60% of their average weekly wages capped at the Social Security Base Benefit Limit.  State employees will be able to take up to a combined six weeks of leave for:

Birth, adoption, or placement of a foster child within one year of birth or placement;

Caring for a spouse, child, or parent who has a serious health condition; 

The employee’s serious health condition; or

There is a 7-calendar day waiting period for medical leave.   

Private sector employers will have the ability to select from a number of VT-FMLI plan design options that allow them to best support the needs of their employees and their business.  Details of the product offering options, including any optional features, have not yet been determined.  However, the options will include at least six combined weeks of paid leave for the reasons and at the rate listed above.   

This new VT-FMLI law has an aggressive implementation timeline, and details for private sector employers are still being released.  In the meantime, The Hartford has a webpage with additional information and FAQs.   

Disclaimer: The intent of this analysis is to provide the recipient with general information regarding the status of, and/or potential concerns related to, the recipient’s current employee benefits issues. This analysis does not necessarily fully address the recipient’s specific issue, and it should not be construed as, nor is it intended to provide, legal advice. Furthermore, this message does not establish an attorney-client relationship.  Questions regarding specific issues should be addressed to the person(s) who provide legal advice to the recipient regarding employee benefits issues (e.g., the recipient’s general counsel or an attorney hired by the recipient who specializes in employee benefits law).

Vermont will be joining its neighbor, New Hampshire, in implementing a voluntary paid family leave program as of July 1, 2024.

Vermont to Launch Voluntary Paid Family and Medical Leave Insurance in 2024

Question: When can employees change their dependent care FSA election mid-year?

Short Answer: Although the Section 125 cafeteria plan irrevocable election rule is very strict, it is relatively easy to modify a dependent care FSA election because any change in use of daycare, change in a daycare provider, or change in an existing daycare provider’s cost generally will qualify as a permitted election change event.

General Rule: Section 125 Cafeteria Plan Irrevocable Election

Employees’ elections to pay the employee-share of the premium for health and welfare plan coverage on a pre-tax basis or make pre-tax FSA contributions are governed by Section 125 of the Internal Revenue Code. The Section 125 cafeteria plan rules are very strict when it comes to the irrevocability of employees’ elections.

That general rule under Section 125 is that all elections (including an affirmative or default election not to participate) must be:

a) made prior to the start of the plan year, and

b) irrevocable for the plan year unless the employee experiences a Section 125 permitted election change event.

The permitted election change events are set forth in Treas. Reg. §1.125-4.  Most cafeteria plans provide a window of 30 days for an employee to make a mid-year election change upon experiencing a permitted election change event.

Newfront Section 125 Permitted Election Change Event Chart

Common Events That Permit Mid-Year Dependent Care FSA Election Change

Although the Section 125 cafeteria plan irrevocable election rule is very strict, it is relatively easy to modify a dependent care FSA election because most events that could prompt an employee to consider changing the election will qualify as a permitted election change event.

Where the employee changes daycare providers, this qualifies as cost change and/or a coverage change permitting employees to modify their dependent care FSA election accordingly.  

This permitted election change event applies even where the employee chooses to move the child to a new provider voluntarily.

Where the employee’s cost of daycare changes, this qualifies as cost change permitting employees to modify their dependent care FSA election accordingly.  

This permitted election change event applies even where the employee decides to pay the daycare provider more (e.g., providing a raise to the nanny).

This permitted election change event applies even where the employee has different daycare costs due to a voluntary (or involuntary) change in employment schedule.

This permitted election change event does not apply where the daycare provider is a relative (related to the employee by blood or marriage).

Where the employee starts or stops using daycare, this qualifies as a coverage change or other event permitting employees to modify their dependent care FSA election accordingly.

This permitted election change event applies even where the employee has voluntarily chosen to change use of daycare.

An employee may use this permitted election change event to enroll in or increase the dependent care FSA election where the spouse begins to work or there is an increase in work hours, thereby creating or increasing reimbursable employment-related dependent care FSA daycare expenses.

An employee may use this permitted election change event to reduce or revoke the dependent care FSA election where a spouse stops working, there is a reduction in work hours, or a child reaches age 13 causing the reduction/loss of reimbursable dependent care FSA daycare expenses.

Dependent Care FSA Election Change: Prospective Effect

Where employees change their dependent care FSA election mid-year, the election change will be effective prospectively.  As the Section 125 regulations put it, the mid-year change is “with respect to the remaining portion of the period of coverage, but only with respect to cash or other taxable benefits that are not yet currently available.”

In other words, the election change has no effect on amounts already contributed year-to-date.  Any amounts already contributed remain available only for valid dependent care expenses incurred during the period of coverage.  The Section 125 use-it-or-lose-it rule requires that any remaining unreimbursed funds after the end of the plan year (or earlier termination of participation) and any grace period and/or run-out period be forfeited to the plan.

There is no option for employers to make exceptions to these rules or directly or indirectly refund (even on a taxable basis) to employees any unreimbursed FSA amounts remaining following termination of participation or at the end of the plan year, plus any related grace period and/or run-out period (subject to any carryover).  Engaging in this practice would risk disqualifying the entire Section 125 cafeteria plan if discovered by the IRS, potentially resulting in all elections becoming taxable to all employees.

For more details: FSA Experience Gains from Forfeitures.

Maverick and Penny have a daughter Amelia who attends an after-school program each day following elementary school.

Maverick makes a $5,000 dependent care FSA election at his employer Coronado Jets’ open enrollment period for the 2023 calendar plan year.

In June, Penny decides to quit working at the Hard Deck bar to spend more time at home with Amelia, which means Maverick and Penny will not have any eligible expenses going forward.

Maverick revokes his dependent care FSA election late in June after incurring $2,000 in daycare expenses year-to-date.

Maverick’s revocation of his dependent care FSA election is prospective in effect as of July 1 and does not affect his $2,500 year-to-date contributions or remaining $500 balance.

If Maverick does not incur any more eligible dependent care FSA expenses in the remainder of 2023, he will forfeit the remaining $500 balance.

Per the use-it-or-lose-it rule, Coronado Jets cannot refund the $500 dependent care FSA directly or indirectly to Maverick, even on a taxable basis.

IRS officials have consistently provided informal guidance stating that an employee’s cafeteria plan election may be corrected where there is “clear and convincing evidence” of a mistaken election.  This approach is commonly referred to as the IRS “doctrine of mistake”.

Although the general rule is that employees’ cafeteria plan elections are irrevocable under Section 125, correcting an erroneous election under the doctrine of mistake is not treated as an impermissible mid-year election change.  Rather, the employer is undoing the erroneous election (including an affirmative or default election not to participate) from ever occurring by replacing it retroactively with the election that the employee clearly intended.

One situation where it is appropriate for employers to consider utilizing the doctrine of mistake to undo an erroneous election is where the employee enrolls in the dependent care FSA despite have no qualifying dependents.  In this case, it is possible for the employer to establish the requisite clear and convincing evidence that a mistake has occurred because the employee cannot possibly benefit from the election.

For more details: The IRS Doctrine of Mistake to Undo Erroneous Dependent Care FSA Elections.

Difficult Dependent Care FSA Eligible Expense Issues

For more details on situations where the qualifying status of dependent care expenses is difficult to determine, see our prior posts:

Dependent Care FSA for Nanny or Family Member Home Childcare

Dependent Care FSA Where Spouse Works from Home or is Self-Employed

Dependent Care FSA When a Child Reaches Age 13

Dependent Care FSA During Maternity Leave

Health FSA and Dependent Care FSA for Parents

Health FSA and Dependent Care FSA for Special Education

In a world where employees are constantly confounded by the Section 125 irrevocable election rule (and carrier limitations) prohibiting them from changing health and welfare plan and FSA pre-tax contribution elections, there is a silver lining.  Employees can change their dependent care FSA election on a prospective basis in response to nearly any change in the employee’s daycare circumstances that could prompt the employee to desire to change their contributions.  However, keep in mind that employees can change their dependent election on a prospective basis only, which can in some cases still result in forfeiture of prior contributions.

For more details on cafeteria plan compliance considerations, see our Newfront Section 125 Cafeteria Plan Guide.

(i) Employee A has one child, B. Employee A's employer, X, maintains a calendar year cafeteria plan that allows employees to elect coverage under a dependent care FSA. Prior to the beginning of the calendar year, A elects salary reduction contributions of $4,000 during the year to fund coverage under the dependent care FSA for up to $4,000 of reimbursements for the year. During the year, B reaches the age of 13, and A wants to cancel coverage under the dependent care FSA.

(ii) When B turns 13, B ceases to satisfy the definition of qualifying individual under section 21(b)(1) of the Internal Revenue Code. Accordingly, B's attainment of age 13 is a change in status under paragraph (c)(2)(iv) of this section that affects A's employment-related expenses as defined in section 21(b)(2). Therefore, A may make a corresponding change under X's cafeteria plan to cancel coverage under the dependent care FSA.

(iv) Application to dependent care. This paragraph (f)(2) applies in the case of a dependent care assistance plan only if the cost change is imposed by a dependent care provider who is not a relative of the employee. For this purpose, a relative is an individual who is related as described in section 152(a)(1) through (8), incorporating the rules of section 152(b)(1) and (2).

(i) Employee A is married to Employee B and they have one child, C. Employee A's employer, M, maintains a calendar year cafeteria plan that allows employees to elect coverage under a dependent care FSA. Child C attends X's on site child care center at an annual cost of $3,000. Prior to the beginning of the year, A elects salary reduction contributions of $3,000 during the year to fund coverage under the dependent care FSA for up to $3,000 of reimbursements for the year. Employee A now wants to revoke A's election of coverage under the dependent care FSA, because A has found a new child care provider.

(ii) The availability of dependent care services from the new child care provider (whether the new provider is a household employee or family member of A or B or a person who is independent of A and B) is a significant change in coverage similar to a benefit package option becoming available. Because the FSA is a dependent care FSA rather than a health FSA, the coverage rules of this section apply and M's cafeteria plan may permit A to elect to revoke A's previous election of coverage under the dependent care FSA, and make a corresponding new election to reflect the cost of the new child care provider.

(i) Employee D is married to Employee E and they have one child, F. Employee D's employer, N, maintains a calendar year cafeteria plan that allows employees to elect coverage under a dependent care FSA. Child F is cared for by Y, D's household employee, who provides child care services five days a week from 9 a.m. to 6 p.m. at an annual cost in excess of $5,000. Prior to the beginning of the year, D elects salary reduction contributions of $5,000 during the year to fund coverage under the dependent care FSA for up to $5,000 of reimbursements for the year. During the year, F begins school and, as a result, Y's regular hours of work are changed to five days a week from 3 p.m. to 6 p.m. Employee D now wants to revoke D's election under the dependent care FSA, and make a new election under the dependent care FSA to an annual cost of $4,000 to reflect a reduced cost of child care due to Y's reduced hours.

(ii) The change in the number of hours of work performed by Y is a change in coverage. Thus, N's cafeteria plan may permit D to reduce D's previous election under the dependent care FSA to $4,000.

(i) Employee G is married to Employee H and they have one child, J. Employee G's employer, O, maintains a calendar year cafeteria plan that allows employees to elect coverage under a dependent care FSA. Child J is cared for by Z, G's household employee, who is not a relative of G and who provides child care services at an annual cost of $4,000. Prior to the beginning of the year, G elects salary reduction contributions of $4,000 during the year to fund coverage under the dependent care FSA for up to $4,000 of reimbursements for the year. During the year, G raises Z's salary. Employee G now wants to revoke G's election under the dependent care FSA, and make a new election under the dependent care FSA to an annual amount of $4,500 to reflect the raise.

(ii) The raise in Z's salary is a significant increase in cost under paragraph (f)(2)(ii) of this section, and an increase in election to reflect the raise corresponds with that change in status. Thus, O's cafeteria plan may permit G to elect to increase G's election under the dependent care FSA.

(4) Exceptions to rule on making and revoking elections. If a cafeteria plan incorporates the change in status rules in §1.125-4, to the extent provided in those rules, an employee who experiences a change in status (as defined in §1.125-4) is permitted to revoke an existing election and to make a new election with respect to the remaining portion of the period of coverage, but only with respect to cash or other taxable benefits that are not yet currently available. 

Navigating dependent care FSA elections mid-year.

Dependent Care FSA Election Changes

Navigating dependent care FSA election mid-year.

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