Now Hear This: California Enacts FSA Notice Requirement

A new California law requires California employers to notify employees who participate in a flexible spending account (FSA) and work in California of any deadlines applicable to withdrawing funds from their FSA before the end of the year. This includes health care FSAs, dependent care FSAs and adoption assistance FSAs.

Requirement

Under the new law, employees must be notified of any deadline to withdraw funds from the FSA before the end of the plan year. The requirement would apply to situations when FSA coverage terminates mid-year (such as a mid-year termination of employment) and the FSA imposes a shortened time period for submitting run-out claims. The intent appears to be to alert terminating employees or employees who otherwise lose FSA coverage mid-year of any deadlines to submit claims to avoid forfeiting FSA amounts. If an FSA does not require claims to filed within a certain period of time after a mid-year termination of coverage (as is often the case for dependent care and adoption assistance FSAs), it appears that the new law would not apply because there is no deadline to withdraw funds before the end of the plan year.

If the requirement applies, affected employees must be notified of the deadline to withdraw funds from the FSA. The law does not specify the timing requirement for the notice but does require that notice be provided in two different forms, one of which may be electronic. Other permissible forms include telephone, text message, mail or in person. Although there are some open questions about the law, it appears that, for example, a notice could be included in the summary plan description (SPD) as well as another form of annual communication, such as open enrollment materials. Another option would be to provide the notice (in two forms) at the time an employee enrolls in an FSA for which the notice requirement applies.

Effective Date

The law does not include a specific effective date. Generally, if a statute enacted during a regular session does not have a specific effective date, it becomes effective on January 1 of the following year (January 1, 2020, in this case). The law also does not specify the penalty for failing to notify employees.

Preemption

In addition, there is an open question about whether ERISA preempts this notification requirement with respect to health care FSAs. ERISA would not preempt such requirements for governmental plans and some church plans. ERISA preemption also would not apply for dependent care or adoption assistance FSAs because these FSAs are not ERISA plans.

In the absence of a specific challenge to the law based on ERISA preemption, however, California employers that sponsor an FSA that imposes a mid-year deadline to withdraw funds should be prepared to comply with the new law starting in 2020.