March 2025: Employer Insights Newsletter

Can FSA Elections Change When
Employee Needs Do?

Employers are sometimes asked by employees if they can make a mid-year reduction in FSA contributions because something happened after enrollment that prevented the employee from receiving anticipated medical care. For example, a doctor would not perform laser eye surgery on an employee who was pregnant, or an employee’s spouse did not have planned dental work because the dentist’s recommendation changed.

Unfortunately, employees cannot change their health FSA elections under the circumstances described above. An employee’s health FSA election is irrevocable during a plan year unless an event occurs that fits within one of the exceptions available under IRS regulations or other guidance. Changes in medical condition or in a provider’s recommendation are not changes in status, nor do they fall within the other exceptions applicable to health FSAs.

Moreover, these situations don’t qualify as “mistakes” that would potentially allow an election change. In fact, the IRS’s 2007 proposed cafeteria plan regulations include an example involving an employee who elects health FSA salary reductions for the next plan year in anticipation of having eye surgery. After the plan year starts, the employee learns that the surgery cannot be performed. The employee’s other eligible medical expenses for the plan year are less than the amount contributed, and, according to this example, the employee must forfeit the remaining balance under the use-or-lose rule.

Although election changes are not allowed under these circumstances, employers can help to minimize employee relations issues by ensuring that enrollment and other materials clearly explain the limited reasons for midyear election changes. Including a real-life example may be helpful. Employers can also remind employees that they may be able to use the funds by submitting other eligible expenses for reimbursement. In addition, an employer plan could be amended to allow health FSA carryovers of up to $660 to the 2026 plan year (The maximum carryover amount is indexed). Another option would be to adopt a grace period, which would give employees extra time to use up remaining funds.

Terminating COBRA For Partial Payment

Once a timely COBRA election and initial premium payment have been made, many employer-sponsored group health plans automatically terminate COBRA coverage if any premium payment is not received by the end of the applicable 30-day COBRA premium payment grace period. If a plan receives a slightly reduced premium payment (a payment that is slightly less than the amount due) and does not receive the rest of the premium by the thirty day grace period following the payment due date, can the plan automatically terminate a qualified beneficiary’s COBRA coverage?

Unfortunately, the answer to this question is no. Coverage cannot be terminated until the plan takes further steps to allow the qualified beneficiary to make up the shortfall. In general, plans are permitted to terminate COBRA coverage for a qualified beneficiary whose premium payment is not made on a timely basis, and plans may treat significant premium underpayments the same as nonpayment—i.e., the plan may terminate COBRA coverage if full payment is not received by the end of the applicable grace period.

However, the IRS COBRA regulations contain special rules for any premium payment that constitutes an “insignificant shortfall.” A shortfall is deemed “insignificant” if it is less than or equal to the lesser of:

$50; or,
10% of the amount of the premium that the plan requires to be paid.

For such shortfalls, COBRA coverage may not be terminated automatically; rather, the plan must notify the qualified beneficiary of the shortfall and give him or her a reasonable period of time in which to make up the difference before COBRA coverage is terminated. A period of 30 days after the shortfall notice is considered a “reasonable period,” although less than 30 days may be reasonable in some circumstances.

This means that, for a required premium of $490, a qualified beneficiary could underpay by as much as $49 and must still be given notice and time (conservatively, 30 days) to make up the shortfall. Alternatively, the plan could simply choose to accept the underpayment as full payment. A plan’s shortfall procedures should be incorporated into its written COBRA procedures, and a notice form should be prepared for use when an insignificant shortfall occurs. Plan administrators may wish to send a shortfall notice immediately when a partial payment is received, rather than waiting until the end of the premium payment grace period. Sending the shortfall notice sooner rather than later will start the 30-day shortfall repayment period running earlier.

In general, terminating COBRA for non-payment or for short payment requires strict adherence to COBRA’s rules. If your group health plan uses a COBRA administrator, the administrator should handle these issues. However, employers that self-administer COBRA should ensure they are familiar with all the COBRA rules.

Form I-9 Internal Audit Checklist

Today’s headlines are filled with warnings of increased immigration enforcement. Complying with Form I-9 requirements has never been more important, but accurate and timely compliance can be challenging. The risk employers face for any errors is real and can be extremely expensive. Employers that fail to comply with Form I-9 requirements can face severe consequences, including civil and criminal penalties.

Federal law requires employers to hire only individuals who may legally work in the United States—either U.S. citizens or authorized foreign nationals. To comply with the law, employers must verify the identity and employment authorization of each individual they hire by completing and retaining the Employment Eligibility Verification form (Form I-9). Employers must have a completed Form I-9 for every employee hired after Nov. 6, 1986.

Though they can be time-consuming and labor-intensive, internal Form I-9 audits can be a systematic means for organizations to ensure compliance with federal law.

This checklist outlines the steps for conducting an internal audit of your organization’s Forms I-9. This checklist is intended to be used as a guide, and not all of the following steps are necessary for an organization’s internal audit. It provides an overview of a Form I-9 internal audit and should not be construed as legal advice. Due to the complex nature of Form I-9 compliance, employers are encouraged to seek legal counsel to discuss and address specific issues and concerns.

Preparing for the Internal Audit

Obtain a copy of the U.S. Citizenship and Immigration Services’ (USCIS)
Handbook for Employers M-274 to reference, if necessary.
Download the current version of Form I-9 from USCIS’ website.
Create a list of currently employed employees hired after Nov. 6, 1986.
Create a list of all employees terminated in the past three years.
Gather Forms I-9, either original or electronic, for all current employees and employees terminated in the past three years.
Verify there is a completed Form I-9 for all current employees.
Complete Form I-9 for any current employees who do have a completed form.

After gathering completed Forms I-9 and creating employee lists, employers can proceed with their internal audit by following the steps below. An internal audit may differ based on an organization’s size and other factors. For smaller employers, it may be best to review every Form I-9. But for larger employers, this may not be practical. Accordingly, if larger employers decide not to review every Form I-9 and review only a sample of its forms instead, they need to ensure the criteria they use to select which forms will be audited are not discriminatory.

Reviewing Section 1 of Form I-9

Ensure the employee’s name—including past or present last names—address, and date of birth are completed.
Verify that the appropriate citizen or immigration status box is checked.
If the employee is a lawful permanent resident, confirm the employee has provided their seven to nine-digit Alien Registration Number or USCIS Number.
If the employee lacks permanent legal status, verify the employee has provided an Alien Registration Number, USCIS Number, Form I-984 Admission Number or foreign passport number.
Verify that the employee signed and dated Section 1 no later than the first day of their employment.
If someone other than the employee completed Section 1, ensure Supplement A, Preparer and/or Translator Certification, for Section 1 is completed.

Reviewing Section 2 of Form I-9

Verify that the citizenship or immigration status number is consistent with the information the employee provided in Section 1.
Ensure one document from List A or a combination of one document each from List B and List C are listed in Section 2 and all information is recorded accurately.
Check that all documents for Section 2 have been entered under the correct list.
Confirm the employee’s first date of employment is entered and accurate.
Ensure the organization’s representative has signed and printed their name and dated the form within three days of the employee’s first day of employment.
Confirm the organization’s name and full address are recorded.
Verify there are copies of the employee’s documents if the organization retains photocopies of employee documents.

Reviewing Supplement B (Formerly Section 3) of Form I-9

If the employee was rehired within three years of the date of the previously completed Form I-9, verify that a block in Supplement B is completed, along with the name of the organization’s representative, signature and title who completed Supplement B.
If the employee’s work authorization has expired, verify that a block in Supplement B is completed, along with the name of the organization’s representative, signature and title who completed Supplement B.
If the employee’s name has changed, enter the employee’s new name in a block of Supplement B.

Correcting Errors

For any errors discovered in Section 1, ask the employee to correct the errors by drawing a line through the incorrect information, entering the correct information, and initialing and dating the correction.
For any errors discovered in Section 2 and Supplement B, draw a line through the incorrect information, enter the correct information, and initial and date the correction.
For forms with multiple errors, complete the section containing multiple errors on a new Form I-9 using the current version of the form. Attach the newly completed form to the original form and include a memo describing any changes and explaining why a new form was completed.
For employees who do not have a completed Form I-9, ask the employee to complete Section 1, inspect the employee’s identity and employability documents, and complete Section 2. Enter the employee’s original date of hire and the date the form is completed.
For employees who do not have a completed Form I-9 but are no longer employed, draft a memo for each employee missing a Form I-9 explaining why there is no completed form for those employees. Store these memos with the organization’s Form I-9 files.