New California Law Requires Additional Flexible Spending Account Notices

Under a California law that took effect on January 1, 2020, employers will have to provide extra notices to California employees enrolled in flexible spending accounts (FSAs) explaining the “use it or lose it” federal tax rules that apply to those FSAs.

AB 1554, which applies to health, dependent care, and adoption assistance FSAs, adds Section 2810.7 to the California Labor Code. The new law requires employers to notify FSA participants “of any deadline to withdraw funds before the end of the plan year.” Though this could be read to apply only to mid-year deadlines to withdraw funds, such as in the case of termination of employment, the limited legislative history suggests that the author was actually concerned more generally with funds remaining in an account at year-end being forfeited.

The law requires employers to provide notice in two different forms, one of which may be electronic. The law includes a nonexclusive list of notice options, including email, telephone, text message, regular mail, and in person.

The law does not specify the timing or the content of the notices. Employers typically provide paper or electronic enrollment materials and benefits materials such as summary plan descriptions that specify the deadlines to withdraw funds and the fact that unused funds will be forfeited.

Employers are likely to challenge the statute as preempted by the Employee Retirement Income Security Act of 1974 (ERISA), at least with respect to health FSAs, which are governed by ERISA.