Q.- We have a calendar year health FSA, but our medical plan runs 7/1 through 6/30. Can we shorten our health FSA to end 6/30 to align the medical plan and FSA?
A.-The IRS only allows a short plan year in very limited circumstances. There must be a valid business purpose for implementing a short plan year. Usually, aligning the cafeteria plan with the medical plan renewal year is considered a valid business purpose.
It is generally not advisable to shorten a health FSA plan year that has already begun. This is because the employees will not be permitted to change their elections, and some employees may have anticipated incurring expenses after July 1. This would likely result in forfeitures under the use-it-or-lose-it rule, as all expenses for reimbursement would have to be incurred during the now-shortened plan year. If the plan had a carryover, it may be permitted to still allow the carryover of up to $500, but this may not be enough for employees. For example, if an employee knew his son was getting braces in September, contributed $2,600 expecting to be reimbursed the full amount in September, had not saved other receipts, the employee would forfeit $2,100.
You could finish the 2017 FSA plan year, and then implement a short plan year of 1/1/18-6/30/18. It would have to be communicated properly so employees were aware of the timeframe for incurring expenses. Starting 7/1/2018, the FSA could be aligned with the medical plan year.
