Can an employee drop FSA coverage mid-year?
Issue:

One of your employees, who is enrolled in your company’s Code Sec. 125 medical flexible spending account (FSA), has a dependent who will be losing her eligibility for coverage under her own plan. The employee does not want to add the dependent, but wants to terminate his current coverage with your health plan and end his participation in the Sec. 125 plan to get private insurance. Is the dependent losing eligibility a status event that allows for a mid-year status change in the Sec. 125 plan? Can he drop his health coverage and the FSA?
Answer:    

If your company’s health plan allows an employee to drop health coverage mid-year, this may be done; however, a change in the FSA is not allowed under the Sec. 125 regulations.

The Sec. 125 plan regulations require election changes made on account of status to satisfy a consistency rule. The final regulations define a consistent election change as one that is on account of and corresponds with a change in status that affects eligibility for coverage under an employer plan. "Consistency," in the case of the employee whose dependent loses eligibility for health coverage, would be to add the qualified dependent to his employer plan and to increase coverage, not to drop coverage entirely. Therefore, the rules would not allow this employee to drop his FSA coverage mid-year.

Source: Internal Revenue Code Sec. 125; IRS Reg. §1.125-4.
[ Return to top of document ]