California's New FSA Law, AB 1554, Leaves Employers With Many Unanswered Questions

California recently passed a law that requires employers to provide notice to their California employees enrolled in an employer-sponsored flexible spending account (FSA) of any deadline to withdraw funds “before the end of the plan year.” However, in true California style, the law is just three short sentences long and is unclear as to when and under what circumstances employers are required to send the second notice.  In addition, the law provides no guidance or regulations to help employers decipher the law’s requirements.  

In this article, we will discuss how employers can take action to comply.

The Basics:

California law AB 1554, went into effect on January 1, 2020, requiring employers sponsoring flexible spending accounts to:

  1. Notify California employees who participate in an FSA of any deadline to withdraw funds before the end of the plan year; and
  2. Provide notice in two different forms, one of which may be electronic. Permitted forms of notice include:
  • Email,
  • Telephone,
  • Text message,
  • Postal mail, and
  • In-person notification.

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.

Why Is California Implementing This Law?

If employees do not use the money in their FSA account during the plan year, the funds are forfeited back to the employer (referred to the use-it-or-lose-it rule). California lawmakers were concerned that employers would be less incentivized to remind employees of the use-it-or-lose-it rule because employers could use these funds to offset administrative costs. In response, California passed AB 1554 to require employers to provide an additional notice of FSA deadlines to their employees.

What Notice Does the Employer Send?

The short and plain reading of the law suggests that employers must notify employees of any deadline to withdrawal funds mid-year, such as in the case of mid-year termination or loss of eligibility. For example, a health FSA may require employees to submit claims and use any remaining funds within 3 months after a termination of employment.

It has been suggested that the spirit of the law may intend to require employers to send a second notice of any deadline to withdrawal funds, regardless of whether the deadline occurs “before the end of the plan year.” Therefore, it may be best practice for employers to send out two notices of FSA withdrawal deadlines to all California FSA enrollees.

Who Should the Notice Be Sent To?

Employers must notify California employees who participate in FSAs, including dependent care FSAs, health FSAs, and adoption assistance FSAs.

When Should the Notice Be Sent?

The law does not specify “when” employers must send the notice. However, employers should work to send the notice within a reasonable amount of time before the deadline to withdraw funds. The most administratively simple method may be to provide the second notice at the beginning of the plan year, or when employees become eligible for the FSA (such as during new hire onboarding).

It is important to note that employers should already be notifying FSA participants of their deadline to withdraw funds when distributing the required FSA Summary Plan Description (SPD) to participants in the beginning of the plan year (which is sometimes done by an employer’s FSA vendor). This new law requires employers to send a separate second notice to California FSA participants.

How Can the Notice Be Provided?

If employers are already distributing an FSA SPD through email, employers can satisfy the second notice requirement by notifying employees in person, through a phone call, or by mail. Employers may want to check with their FSA vendor to see how they currently notify their FSA participants of withdrawal deadlines to determine what other forms of notice can be performed. FSA vendors may also provide assistance with the second notice requirement. Some options employers may want to consider could include providing in person written notice in open enrollment materials or in a terminating employee’s off-boarding paperwork.

What Are the Penalties for Non-Compliance?

The bill does not include any specific penalties for employers who fail to provide the notice. However, if a California employee fails to receive this notice and is forced to forfeit unused funds due to a mid-year deadline, the employer may face potential labor code violations.

In Closing…Employers Should Take the Following Actions:

  • Employers with California employees enrolled in an FSA should notify employees, by two means of communication, of their deadlines to withdraw funds.
  • Employers may want to contact their FSA vendor to determine the best avenue for complying with this additional notice requirement.

Additional Resources:

The information and materials in this article are provided for informational purposes only and are not intended to constitute legal advice.

For more information, please contact one of our Employee Benefit specialists, Nathan Wollenman or Blanca Garcia: