As an administrator, you may receive questions from employees about changing their FSA, LPFSA, or other pre-tax elections mid-year—especially following a Qualifying Life Event (QLE). This article outlines how to explain the IRS rules around election changes, the limitations built into Forma’s plan documents, and what happens in edge cases like termination or overspending.
Key IRS Rules for Election Changes
Because FSA benefits are offered under the Section 125 plan, FSA elections are subject to the Irrevocable Election Rule. Under that rule, FSA elections made during open enrollment cannot be changed during the plan year unless the employee experiences a QLE.
There are two requirements an employee must meet to change their pre-tax election:
- The employee must experience a QLE, such as marriage, divorce, birth/adoption, or change in employment status.
- The requested election change must be consistent with the QLE.
Examples you can use with employees:
- If they have a baby, they may increase their election to cover additional dependent expenses. Or, they may decrease their election if the employee becomes eligible for and enrolls in coverage under a spouse’s plan.
- If they get divorced, they may decrease their election because they are no longer covering a spouse. Or, they may increase their election if the employee loses coverage under the ex-spouse’s plan.
The IRS allows both increases and decreases, provided they are logically tied to the life event.
Can Our Plan Restrict Certain Changes?
Yes—but most employers choose not to. While it’s possible to limit election changes (e.g., only allow increases), the industry standard is to allow all changes permitted by the IRS.
Forma’s plan documents are written accordingly, and our Support team will reference IRS-permitted changes when assisting members. If your organization has different rules, employees should be directed to your internal benefits team for clarification.
Important Limitation: Election Decreases
You may need to explain to employees that they cannot reduce their election below what they've already spent in the plan year.
Example:
- An employee elects $3,000 during open enrollment and spends $3,000 by June.
- They want to reduce their election to $2,000 due to a QLE.
- This is not allowed, since they've already used the full $3,000.
This rule is in place to protect your organization from financial risk and is built into Forma’s documentation by default.
What if an Employee Spends More Than They've Contributed and Then Changes Their Election?
As long as the employee remains eligible and enrolled, they can only decrease their election down to the amount they’ve spent—not below it.
However, if the employee terminates employment or loses eligibility, they:
- Cannot be required to pay back the difference between what they’ve spent and what they’ve contributed.
- Cannot contribute more to cover the shortfall after leaving the plan.
This is a standard risk of loss that applies to all FSA plans. Similarly, an employee who contributes more than they spend before terminating loses access to unused funds.
If you or any of your employees have questions about election changes and QLEs, contact Forma at support@joinforma.com