Before the plan year begins. FSA needs a new election every year; POP re-affirms in many plans.
Collect initial elections prospectively before the first deduction.
Allowed only for a qualifying life event, within the plan's window, prospective only.
| Trigger | Due Date / Window | Notes |
|---|---|---|
| Open Enrollment (annual) | Before plan year begins | FSA: new election required every year. POP: confirm pre-tax premium election; many plans re-affirm annually. |
| New hire / newly eligible | Before coverage effective date | Collect initial elections (POP and/or FSA) prospectively before the first deduction. |
| Mid-year change | Within plan's QLE window | Allowed only for specific qualifying life events. All changes are prospective, no retroactive adjustments. |
- Written Section 125 Plan Document covering POP and/or FSA, with election and mid-year change rules defined.
- Salary Reduction Agreement (POP): employee's choice of pre-tax vs. after-tax premium deduction; dependents covered; effective date.
- FSA Election Form: annual dollar election (Health FSA up to $3,400 in 2026; Dependent Care FSA up to $7,500 in 2026), per-pay-period calculation, use-it-or-lose-it/carryover/grace period notice.
- Mid-Year Change Request Form with qualifying life event documentation requirements.
- Payroll setup: pre-tax deduction codes confirmed and implementation date documented.
- E-sign is fine: Use HRIS/portal or fillable PDFs with e-signature; keep a date and time stamp on every submission.
- Prospective only: Start or modify deductions on or after the effective date; pre-tax treatment cannot be applied retroactively.
- Paper option: Offer paper upon request; scan and store centrally once received.
- Signed electionsPOP and FSA, with effective dates and elected amounts.
- Payroll change logsShowing when each deduction began or changed.
- Mid-year change requestsWith documentation of the qualifying life event.
- Annual archiveBy plan year; retain for at least 7 years (or per your records retention policy if longer).
Common traps
FAQs
Can we default employees into pre-tax premiums without a signature?
Yes, if your written §125 plan document authorizes a negative election (opt-out default), you give employees advance notice of the default and how to decline, and you give them a real chance to opt out before the first affected paycheck. This is common for the POP premium election; see Negative Election / Automatic POP Enrollment under Special Cases below for the requirements and a notice/opt-out form. Health FSA negative elections are technically permitted under the same conditions (Rev. Rul. 2000-8), but most employers keep FSA elections affirmative because defaulting someone into an FSA they don't use can forfeit their own pay under the use-it-or-lose-it rule.
Do FSA elections carry over automatically to the next plan year?
No. Employees must make a new FSA election before each plan year. If they don't elect, they're out for that year. The carryover provision (up to $680 in 2026) carries over unused funds, not the election itself.
Can an employee change their election mid-year?
Only on a qualifying life event: marriage, divorce, birth or adoption, loss or gain of other coverage, certain cost or coverage changes, and a few other IRS-recognized events under 26 CFR § 1.125-4. All mid-year changes are prospective. Document the event and the date.
What happens to unused Health FSA funds at year-end?
Depends on your plan design: use-it-or-lose-it (default), limited carryover (up to $680 in 2026), or a grace period of up to 2½ months. You can only choose one; plans cannot offer both carryover and a grace period. Communicate the rules clearly at open enrollment.
Are signed elections required, or can verbal consent suffice?
Signed elections are required. They substantiate the employee's pre-tax treatment and the employer's authority to reduce wages. A payroll change entry alone is not sufficient.
- IRS Publication 15-B (2026): Employer's Tax Guide to Fringe Benefits. Covers cafeteria plan rules, what benefits qualify under Section 125, and pre-tax treatment requirements.
- IRS Publication 969: Health Savings Accounts and Other Tax-Favored Health Plans. Covers Health FSA rules, contribution limits, use-it-or-lose-it, carryover, grace period, and interaction with HSAs.
- IRS FAQs: Cafeteria Plans. Plain-language Q&A on Section 125 plan requirements, qualifying benefits, and non-discrimination rules.
Negative Election / Automatic POP Enrollment (Opt-Out Basis)
You may enroll employees in the POP premium election automatically, on an opt-out basis, instead of collecting an affirmative signature from each one. The IRS has permitted these "negative elections" for §125 plans since Rev. Rul. 98-30. Three conditions must be met: (1) your written §125 / POP plan document expressly authorizes the negative election, see the POP page; (2) you give each employee advance notice describing the default election (which premium will be taken pre-tax, and the amount) and exactly how to opt out or elect cash / after-tax instead; and (3) you give them a reasonable opportunity to opt out before it takes effect, for new hires, before the first affected paycheck is available; for current employees, before the start of the next plan year. Use the Negative-Election Notice & Opt-Out Form in Templates & Resources below. Once the opt-out window closes, the default pre-tax election applies and is irrevocable for the plan year absent a qualifying life event, just like an affirmative election.
HSA-Compatible Plans: Limited Purpose FSA Required
If an employee contributes to a Health Savings Account (HSA), they cannot also have a standard Health FSA; the FSA disqualifies them from making HSA contributions. The workaround is a Limited Purpose FSA (LPFSA), which covers only dental and vision expenses and is HSA-compatible. If your employees have both an FSA and an HSA (or want to), confirm your FSA plan document offers an LPFSA option and that employees understand the distinction when they elect.
Dependent Care FSA (DCFSA)
Dependent Care FSAs follow different rules than Health FSAs. The annual limit is $7,500 per household ($3,750 if married filing separately) for 2026, increased from $5,000/$2,500 under the One Big Beautiful Bill, set by statute, not indexed for inflation. DCFSA funds cover qualifying child care and dependent care expenses, not medical expenses. Annual elections are required each year; mid-year change rules apply but differ slightly from health FSA rules. There is no carryover option for DCFSAs, though a grace period of up to 2.5 months may be offered.
Non-Discrimination Testing
Section 125 plans must annually pass three non-discrimination tests: the eligibility test, the contributions and benefits test, and the key employee concentration test. If your plan fails, highly compensated employees (HCEs) and key employees lose pre-tax treatment on their elections; it becomes taxable income to them. Small employers and those with a high ratio of HCEs to rank-and-file employees should review test results before open enrollment closes.
New Jersey and Alabama State Tax Conformity
New Jersey and Alabama do not conform to federal Section 125 pre-tax treatment. Employees in these states owe state income tax on Health FSA and POP salary reductions even though those amounts are excluded from federal income. If you have employees in NJ or AL, confirm your payroll system handles state withholding correctly on FSA/POP contributions; federal pre-tax does not automatically mean state pre-tax.
FSA and COBRA
When an employee terminates, they may be entitled to COBRA continuation of a Health FSA through the end of the plan year if their account balance (amount available to claim) is greater than the cost of continuation coverage. The employer must include Health FSA COBRA rights in the COBRA election notice. Dependent Care FSAs are not subject to COBRA.
Mid-Year Plan Amendments
Employers can amend a Section 125 plan mid-year in limited circumstances (e.g., in response to legislative or regulatory changes, or certain permitted coverage changes). Plan amendments generally cannot give employees retroactive elections. If you need to amend your plan, consult your benefits attorney or TPA before communicating changes to employees.
Collect elections before the plan year begins, not at the time of the first deduction. For 2026 plans, the Health FSA limit is $3,400 and the carryover limit is $680. Keep a signed copy of every election in the employee's file.
Salary Reduction Agreement, Premium Only Plan (POP)
[Company Name] Section 125 Plan, Plan Year: _____________ to _____________
I, [Employee Name], elect to have my compensation reduced each pay period by the amount of my share of premiums for the following employer-sponsored benefits, and to have those amounts applied on a pre-tax basis under the [Company Name] Section 125 Premium Only Plan:
| Benefit | Coverage Level | Employee Premium (per pay period) | Pre-Tax ☐ / After-Tax ☐ |
|---|---|---|---|
| Medical | ☐ EE ☐ EE+1 ☐ Family | $_____________ | ☐ Pre-Tax ☐ After-Tax |
| Dental | ☐ EE ☐ EE+1 ☐ Family | $_____________ | ☐ Pre-Tax ☐ After-Tax |
| Vision | ☐ EE ☐ EE+1 ☐ Family | $_____________ | ☐ Pre-Tax ☐ After-Tax |
| ☐ Waive all coverage | I decline coverage for this plan year. | ||
I understand that this election is irrevocable for the plan year except in the event of a qualifying life event as defined under my employer's Section 125 Plan and IRS regulations. I may request a paper copy of the plan document from HR at any time.
Employee Signature: __________________________ Date: ______________
Effective Date of Election: ____________________ Plan Year: _____________ to _____________
[HR Use Only] Entered in payroll: _____________ By: _____________
POP Negative-Election Notice & Opt-Out Form
Use this only if your §125 / POP plan document authorizes automatic (negative) election. Provide it far enough before the first affected paycheck (new hires) or before the plan year (current employees) that the employee has a genuine chance to opt out. Keep a copy on file, including for employees who do not return it, since the default pre-tax election applies to them.
[Company Name] Section 125 Premium Only Plan, Plan Year: _____________ to _____________
What is happening: [Company Name] offers a Section 125 Premium Only Plan that lets you pay your share of employer-sponsored insurance premiums with pre-tax dollars, lowering your taxable income. Unless you opt out, your share of the premiums below will be deducted on a pre-tax basis automatically, beginning [effective date].
| Benefit | Your Premium (per pay period) | Default Treatment |
|---|---|---|
| Medical | $_____________ | Pre-tax unless you opt out |
| Dental | $_____________ | Pre-tax unless you opt out |
| Vision | $_____________ | Pre-tax unless you opt out |
If you do nothing: your premiums will be taken pre-tax as shown above, and that election is irrevocable for the plan year unless you experience a qualifying life event.
To opt out, pay premiums after-tax or decline coverage, complete and return this form to [HR contact / email] no later than [opt-out deadline]:
- ☐ I decline pre-tax treatment. Deduct my premiums on an after-tax basis.
- ☐ I waive the coverage shown above entirely for this plan year.
Employee Name (print): ___________________________
Employee Signature: ______________________________ Date: ______________
[HR Use Only] Notice provided to employee on: _____________ | Opt-out deadline: _____________ | Form returned? ☐ Yes ☐ No (default pre-tax election applied) | Entered in payroll: _____________
FSA Election Form (Health FSA and/or Dependent Care FSA)
[Company Name] Section 125 Plan, Plan Year: _____________ to _____________
Employee Name: __________________________ Department: __________________________
Health FSA Election (2026 maximum: $3,400; carryover limit: $680 if offered by your plan)
☐ I elect to contribute: $_____________ for the plan year ($_____________ per pay period based on ___ pay periods)
☐ I waive Health FSA participation for this plan year.
Note: If you have or plan to open an HSA, consult HR before electing a Health FSA. A standard Health FSA may disqualify you from HSA contributions.
Dependent Care FSA Election (2026 maximum: $7,500; or $3,750 if married filing separately)
☐ I elect to contribute: $_____________ for the plan year ($_____________ per pay period based on ___ pay periods)
☐ I waive Dependent Care FSA participation for this plan year.
Plan Design Reminder (circle what applies to your Health FSA): Use-It-or-Lose-It / Carryover (up to $680) / Grace Period (through [date])
I understand that FSA elections are irrevocable for the plan year except on a qualifying life event, and that unused Health FSA funds exceeding the carryover or grace period will be forfeited at year-end.
Employee Signature: __________________________ Date: ______________
Effective Date: ______________________________ Plan Year: _____________ to _____________
[HR Use Only] Entered in payroll: _____________ By: _____________
Mid-Year Election Change Request
[Company Name] Section 125 Plan, Plan Year: _____________ to _____________
Employee Name: __________________________ Date of Request: ______________
Qualifying Life Event (check one):
- ☐ Marriage or divorce
- ☐ Birth, adoption, or placement for adoption
- ☐ Death of a dependent
- ☐ Employee or dependent gains or loses other coverage
- ☐ Significant cost or coverage change
- ☐ Change in employment status (employee or spouse/dependent)
- ☐ Other qualifying event: _________________________________
Date of qualifying event: ____________________
Documentation attached: ☐ Yes ☐ No (explanation: _______________________)
Requested Change:
☐ POP: Change premium election from $_______ to $_______ per pay period, effective _____________
☐ Health FSA: Change annual election from $_______ to $_______ (new per-pay amount: $_______), effective _____________
☐ DCFSA: Change annual election from $_______ to $_______ (new per-pay amount: $_______), effective _____________
☐ Discontinue pre-tax deduction(s): _________________________, effective _____________
I understand that this change is prospective only and must be consistent with and on account of the qualifying life event described above.
Employee Signature: __________________________ Date: ______________
[HR Use Only] Event verified: _____________ Change entered in payroll: _____________ By: _____________
Salary Reduction Agreement Checklist
- Written Section 125 Plan Document in place and current.
- Elections collected before plan year starts (or before coverage date for new hires).
- FSA elections made annually, no auto-rollover of elections.
- 2026 Health FSA limit ($3,400) and carryover limit ($680) reflected in forms and communications.
- Employees with HSAs directed to Limited Purpose FSA option.
- Payroll pre-tax codes set up correctly and first deduction verified.
- Mid-year changes accepted only on qualifying life events with documentation.
- All changes applied prospectively, no retroactive pre-taxing.
- Elections archived by plan year; retained for at least 7 years.
- Non-discrimination testing completed before open enrollment closes.