California Mandates a Notice Requirement for Flexible Spending Accounts

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Employee Health & Benefits National Compliance Leader
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October 28, 2019

But California gets an incomplete

California recently enacted AB 1554, which requires employers sponsoring flexible spending accounts to notify employees of “any deadline to withdraw funds before the end of the plan year.” 

The law does not define the term “flexible spending account,” but it does indicate this term is intended to include dependent care flexible spending accounts (“DCFSAs”), health care flexible spending accounts (“HCFSAs”), and adoption assistance flexible spending accounts. We’ll refer to these collectively as FSAs in this article. It is not immediately clear what other benefits, if any, might be considered FSAs subject to this law.[1] As written, it does not appear this includes pre-tax transportation benefit plans.

The Bottom Line

We’ll address the rules in more depth later in this article, but the main takeaways are:

  1. Employers offering FSAs to employees working in California will be required to provide two forms of notification regarding forfeiture deadlines for unused funds.
  2. California will need to clarify certain items not addressed in the law.
  3. The notification requirements appear limited to mid-plan year forfeitures.
  4. Most HCFSAs should be exempt from the notification requirement due to ERISA preemption.

So, when exactly?

The notification requirement is effective January 1, 2020, apparently without regard to an FSA’s actual plan year.

The basics

Participants forfeit unused FSA funds at the end of the plan year. This is commonly referred to as the “use it or lose it” rule, and it is delayed and/or affected only by the FSA’s use of a run-out period, grace period, or a carryover (in the case of an HCFSA).

California’s new law requires employers to notify employees of an FSA forfeiture deadline, presumably to help the employees avoid forfeitures. Employers must communicate this notice in at least two different forms. The following is a non-exhaustive list of permitted forms of this notice:

  • Email,
  • Telephone,
  • Text message,
  • Postal mail, and
  • In-person notification.[2]

An employer can only satisfy one of the two forms of notification electronically, meaning the second form of notice must be verbal or printed. An FSA’s summary plan description (or comparable document) should describe the FSA’s forfeiture rules. Delivery through a web portal, email, or in printed form will satisfy one of the required forms of notification. While a variety of forms of alternative notices could be used to satisfy the second form of notification, we suspect FSA vendors will develop template notices that can be used for this purpose and will likely assist employers with delivery.

Missing pieces…

AB 1554 is only three sentences long and leaves several unanswered questions.

  1. Timing requirement?

    Although the law is effective beginning January 1, 2020, it does not include any specific timing requirement for notice delivery. As written, an employer could comply with the letter of the law by frontloading two forms of notification at the beginning of a plan year. The spirit of the law seems to be designed to provide a warning about an impending forfeiture. We believe later guidance will require one of the notifications to be closer in time to the forfeiture deadline.   

  2. Two forms of notice?

    The law specifies two forms of notice are required, but does this mean an employer can satisfy the law by delivering the same notice in two different ways? We believe later guidance will clarify that two separate types of notice are required.

  3. Consequences for non-compliance?

    The law doesn’t indicate what happens if an employer fails to comply. Is the employer subject to a fine? Do affected employees receive more time to submit claims before forfeiture occurs? This must be addressed in later guidance.

Appears limited to mid-plan year forfeitures

Again, the law requires employers sponsoring flexible spending accounts to notify employees of “any deadline to withdraw funds before the end of the plan year.” This appears intended to require employers to notify employees who may be subject to mid-plan year forfeitures of unused FSA funds.

Although technical, participants are not required to withdraw funds before the end of the plan year to avoid normal plan year end FSA forfeitures. Forfeiture could be avoided by withdrawing funds by or as of the end of the plan year. This may simply be a case of imprecise language, and California could certainly clarify one way or the other. In any event, this will usually be moot. The overwhelming majority of FSAs provide for run-out and/or grace periods that delay forfeiture until after the end of the plan year. As a result, California’s notice requirement wouldn’t apply to most plan year end FSA forfeitures anyway.[3]

Some FSAs do not accelerate forfeitures for mid-plan year losses of eligibility and should also avoid the notice requirements.[4] By contrast, mid-plan year losses of FSA eligibility usually can result in a need to use funds before the end of the plan year to avoid forfeitures. This appears to be the real target of California’s law. For example, an FSA might require a former employee to submit already incurred claims within 60 days of the loss of employment before the funds are forfeited.

It’s not clear how the notice requirement might apply to a short plan year as a result of a plan amendment or termination.

ERISA preemption

Most HCFSAs are self-insured ERISA plans, and ERISA preemption should apply to California’s notice requirement. It is a slam dunk that ERISA will preempt the law from any modification of the HCFSA’s forfeiture rules. California does not always automatically recognize ERISA preemption, and it may take a successful challenge before California backs off. An employer can always voluntarily comply with the notice requirements, and a conservative employer will want to comply until someone [else] is successful with an ERISA preemption challenge.

ERISA preemption is not available for the HCFSAs of governmental entities or church plans, DCFSAs, or adoption assistance flexible spending accounts. Employers should be ready to comply with the notice requirements for these FSAs by January 1, 2020.


[1] A health reimbursement arrangement (HRA) could theoretically qualify as an HCFSA, but most cannot due to an unrestricted carryover feature for unused funds. We will not discuss HRAs further in this article.

[2] Hand delivery of a printed document should qualify as in-person notification.

[3] Various FSA rules generally require some sort of notification to participants about the plan and its operations, so this just means the employer likely doesn’t have to provide a second form of notice.

[4] This should include DCFSAs with a permitted spend down feature for terminated participants.