Employers with California Employees who sponsor Flexible Spending Accounts May Have New Notice Requirements

A new California law (AB 1554) imposes a new notice mandate on employers with employees in California.  The law requires employers, beginning in 2020, to notify their flexible spending account (FSA) enrollees – via two different modes of communication – about any deadline to withdraw funds from the FSA where that deadline is prior to the end of the plan year.

The law is written to apply to all FSAs – health, dependent care, and adoption assistance.  ERISA may very well preempt the law with respect to health FSAs sponsored by employers that are subject to ERISA.  The Department of Labor has long taken the position that ERISA preempts state-imposed notice obligations that affect an employer’s administration of its ERISA plans, and a health FSA maintained by an ERISA employer is an ERISA plan.  However, the preemption issue may have to be litigated before employers can be sure it is safe to ignore the rule for health FSAs.  In any event, a dependent care or adoption assistance FSA is not an ERISA plan, and thus can be subject to state notice mandates.

Because most FSAs allow for an extended claims submission period after the close of the plan year, the law originally appeared to impact FSAs that require employees who terminate employment or otherwise lose FSA eligibility before the end of the plan year.  Many FSAs require participants who become inactive mid-year to submit claims within a certain period after their termination of employment or other loss of eligibility (which deadline could occur prior to the end of the plan year).  However, subsequent informal guidance has suggested the law is intended to apply to all deadlines, including those based on the end of the plan year or later, and that the notices should be given a reasonable time period before the last date claims can be submitted, whenever that deadline occurs.

The law requires notice be given by two different forms, one of which may be electronic, and then provides a list of modes of communication, including email, telephone, text message, postal mail and in-person communication.  Written notice provided to FSA enrollees in a plan document, summary plan description, benefits guide or other open enrollment materials would likely satisfy one mode of communication, but the employer also will need to communicate the withdrawal deadline by some other means.  Hopefully, future guidance will clarify the permissible modes and timing of the required guidance.

The California law does not provide a specific penalty for failing to comply with the required notices, but informal guidance has suggested a failure may be a California labor law violation.  Employers who fail to comply risk an employee requesting a distribution after the deadline has passed.  Federal tax law prohibits allowing employees to cash out their unspent funds, but an employee who was not properly notified of the deadline to submit reimbursement requests is arguably harmed absent a cashout.

Employers with California employees should:

  1. Keep an eye out for additional guidance regarding compliance.
  2. Cover all bases by ensuring the required notices are given, two different ways, a reasonable time period before all deadlines for claims to be submitted for any non-ERISA FSAs (dependent care, adoption assistance).
  3. Consider also complying with the required notices for health FSAs until the pre-emption issue is settled.

For more information regarding compliance with the new California notice requirements for FSA participants, contact Roberta Casper Watson or Dannae Delano.