A new California law requires employers that sponsor flexible spending accounts ("FSAs") to notify employees in two different ways about any deadline to withdraw funds before the end of the year. The law applies to health FSAs and dependent care FSAs and will take effect January 1, 2020.
Assembly Bill 1554
At a mere three sentences long, the new law raises more
questions than it answers. What is clear is that the law aims to
apply to any employer that sponsors an FSA and imposes a mid-year
reimbursement deadline. Mid-year reimbursement deadlines are quite
common. For example, an employer may require former employees to
submit all claims for reimbursement within 30-90 days of their
termination.
Covered employers must notify all employees who participate in an
FSA of the deadline to withdraw funds. In addition, notice must be
provided in two different forms. Notice may be given several ways,
including in-person or over the telephone, or via mail, e-mail or
text message. However, only one of the notices may be given
electronically. The law does not specify when notices must be
provided or the contents of the notices. Nor does the law identify
the penalty for noncompliance.
ERISA Preemption?
ERISA generally preempts state laws that relate to ERISA plans. Since health FSAs are ERISA plans, ERISA likely preempts California's new notice requirements with respect to health FSAs. However, employers should also be aware that California agencies can be hesitant to recognize ERISA preemption absent a court ruling. In addition, dependent care FSAs are not ERISA plans and therefore are subject to the new state law.
Next Steps
Employers that allow employees to submit FSA claims through the end of the year regardless of employment status do not need to act. However, all other employers that sponsor an FSA should decide whether to amend their plans to allow for claim reimbursements through the end of the year. Employers wishing to continue their current practices will need to determine the best way to provide notices to employees, or decide that ERISA preempts the notice requirements (at least with respect to its health FSA).
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