When can employees change their pretax deductions?

The cafeteria-plan rules require employees to designate their pretax deductions before the start of the plan year. For calendar-year plans, employees will be making changes very soon for the 2025 plan year.

But stuff happens, and this stuff doesn’t account for another cafeteria-plan rule that requires employees’ designations to be locked in for the entire plan year. However, there are circumstances under which cafeteria plans may—but aren’t required to—allow employees to change their pretax deductions.

Other laws, like the FMLA and HIPAA, come into play here, too.

General rules

Cafeteria plans may allow employees to change their elections for any cafeteria-plan benefit during a plan year if employees’ change of status impacts benefits eligibility. The big three changes in status include:

• Marital status or number of dependents. The cafeteria-plan rules are permissive, but under HIPAA, employees must be allowed to change their pretax deductions for health benefits when they qualify for a special enrollment period. Special enrollment periods don’t apply to stand-alone dental and vision plans or to most health FSAs, however
• A reduction or increase in employees’, spouses’ or dependents’ working hours
• Employees’, spouses’ or dependents’ eligibility for Medicare or Medicaid.

Employees may change their health FSA pretax contributions if they move inside or outside of an HMO service area and change their health-plan option, their annual earnings decrease due to a job change and they remain eligible to participate in the major medical plan, or their anticipated medical costs increase or decrease due to unanticipated factors, including:

• Their FSAs were funded with an expectation of low out-of-pocket expenses, but midway through the year, their out-of-pocket expenses significantly.
• Their FSAs were funded with an expectation of using a specific prescription drug at a fixed co-pay. A more expensive drug is then substituted or they no longer need to take the drug.

For dependent-care benefits, employees may change their pretax deductions if:

• The safety or quality of their current day care provider raises concerns.
• The day care provider has age cutoffs and won’t take infants, and employees don’t want to split up their kids at different providers.
• Employees enroll their kids in a new, state-of-the-art day care center.
• Employees’ kids are enrolled at a temporary day care center and a place opens up at their preferred center.
• A day care center raises it rates.

Employees taking FMLA leave

Whether employees can change their pretax deductions while they’re on leave depends on the benefit.

Health benefits: Employees can revoke or continue their health benefits, including their health FSAs, when they’re on leave. Employees who revoke must be reinstated when they return to work. Employees who continue their benefits may prepay by cashing in accrued time or pay with after-tax dollars by writing a check. Alternatively, you can pick up the tab and arrange for them to reimburse you when they return to work.

Dependent-care benefits: There’s no need for a similar mandate to continue dependent-care benefits, because in order to be eligible as dependent-care benefits, the benefits must allow employees to work. Employees on FMLA leave aren’t working. This rule applies even when an employee’s spouse in on FMLA leave.