Flexible Spending Account Changes for Long Island Employers

The Trump administration's proposal to allow Americans to withdraw from their 401(k) plans for home down payments could fundamentally change how Long Island employees view their retirement benefits. Combined with extended FSA deadlines now running through March 15, these ancillary benefit changes demand immediate attention from Nassau and Suffolk County employers.

What's Changed for Retirement and Spending Accounts

The proposed 401(k) home purchase provision would allow first-time homebuyers to withdraw up to $25,000 from their retirement accounts without the typical 10% early withdrawal penalty. For Long Island's high-cost housing market—where median home prices exceed $500,000—this could make your 401(k) plan significantly more attractive to younger employees.

Simultaneously, FSA grace periods have been extended to March 15, giving employees additional time to spend down their flexible spending account balances. This extension affects both healthcare FSAs and dependent care FSAs, which now allow up to $7,500 in annual contributions.

The Business Impact: Retention vs. Retirement Security

For medical practices, dental offices, and professional service firms competing for talent, the 401(k) home purchase option creates a recruitment advantage. However, experts warn this could undermine long-term retirement security, potentially leaving employees financially vulnerable later in their careers.

The math is sobering: a 30-year-old who withdraws $25,000 today loses approximately $175,000 in retirement wealth by age 65, assuming a 6% annual return. This puts employers in a difficult position—offering a benefit that helps with immediate housing needs while potentially harming employees' financial futures.

Meanwhile, the extended FSA deadlines reduce the "use it or lose it" pressure that often frustrates employees. This change makes FSAs more attractive as an employee benefit, but requires clear communication about the March 15 deadline to prevent forfeited funds.

Compliance and Communication Requirements

Long Island employers must update their plan communications and employee education materials to reflect these changes. The 401(k) provision, once enacted, will require amendments to plan documents and new participant notices explaining the withdrawal option and its long-term consequences.

For FSAs, employers should immediately communicate the March 15 deadline extension to prevent employee confusion. Many workers still believe the old December 31 deadline applies, which could result in unnecessary forfeitures and employee dissatisfaction.

Strategic Considerations for Long Island Employers

Law firms, accounting practices, and nonprofits should consider how these changes align with their broader benefits strategy. The 401(k) home purchase option may help recruit younger professionals who view homeownership as financially impossible in Nassau and Suffolk Counties' expensive markets.

However, employers should also consider offering financial wellness education to help employees understand the trade-offs. Engaging benefit communication becomes crucial when employees face complex decisions about retirement security versus immediate housing needs.

For dependent care FSAs, the increased $7,500 limit combined with the extended deadline makes this benefit particularly valuable for working parents. Long Island's high childcare costs—often exceeding $15,000 annually—mean maximizing dependent care FSA contributions provides substantial tax savings.

Action Items for Q1 2025

Employers should immediately audit their current FSA communications to ensure employees understand the March 15 deadline. Review your current benefits package to identify opportunities for better FSA utilization and dependent care support.

Prepare for the 401(k) home purchase provision by developing educational materials that explain both the benefits and risks. Consider partnering with financial advisors to offer objective guidance to employees considering this option.

Most importantly, ensure your plan administration can handle the increased complexity these changes bring to benefits management and employee communications.

Rather than managing these complex changes alone, Benton Oakfield handles all aspects of ancillary benefit compliance and employee education, ensuring your Long Island business stays current with evolving regulations while maximizing the value of your benefits investment. Our team provides the ongoing support needed to navigate both immediate deadlines and long-term strategic planning.

Compliance Note: Benefit plan rules and tax implications vary based on company size and location. This summary is for informational purposes only. Please contact your Benton Oakfield representative to review how these changes impact your specific plan documents.