IRS Gives More Flexibility For Cafeteria Plans Due To COVID-19

On May 12, 2020, the IRS released Notice 2020-29, which provides temporary flexibility for mid-year election changes under a Section 125 cafeteria plan during calendar year 2020. The changes are designed to allow employers to respond to changes in employee needs as a result of the COVID-19 pandemic.  This guidance relates to mid-year elections for fully insured and self-insured employer-sponsored health coverage, health flexible spending arrangements (health FSAs) and dependent care assistance programs (DCAPs).

Permitted Election Changes:

For employer-sponsored health coverage, a Section 125 cafeteria plan may permit an employee to prospectively:

  • Make a new election if the employee previously declined coverage;
  • Revoke an existing election and enroll in different health coverage sponsored by the employer; or
  • Revoke an existing election, if the employee is or will be enrolled in other health coverage.

In addition, the IRS relaxed the mid-year election change rules for health FSAs and DCAPs for 2020 to allow participants to revoke their elections, make new elections or increase or decrease existing elections.  In addition, with respect to health FSAs and DCAPs, employers are permitted to limit mid-year elections to amounts no less than amounts already reimbursed.  For example, if an employee elected $2,500 and has received $2,000 YTD, you may limit the decrease to $2,000 to the employee’s salary reduction will cover the reimbursement.  It is also important to note that election changes may not be retroactive (i.e., no refunds).  Therefore, DCAP elections already contributed for future daycare expenses (i.e., summer camps) may not be returned to the employee.

Also on May 12, 2020, the IRS announced more options with respect to unused amounts in health flexible spending accounts (FSAs) and dependent care assistance programs (DCAPs). These options allow employers to permit:

  • The plan may offer an extended period for incurring health FSA or DCAP expenses; and
  • If your health FSA plan includes a year-end carryover, the amount can be increased from $500 to $550.

Extended Period:

Due to the COVID-19 outbreak, employees may be more likely to have unused amounts in their health FSAs or DCAPs. IRS Notice 2020-29 allows employers to permit employees to apply unused amounts remaining in a health FSA or a DCAP at the end of a plan year ending in 2020 to pay or reimburse expenses incurred through Dec. 31, 2020. This relief applies to all health FSAs, including health FSAs that allow both grace periods and year end carryovers (keep in mind that health FSAs can either have a grace period or a carryover amount, but cannot have both).  For example, a health FSA that has a 2019 calendar year plan year and provides for a 2.5 month grace period ending on March 15 immediately following the end of the plan year, the employer may amend the plan to permit employees to apply unused amounts remaining in an employee’s health FSA as of March 15, 2020, to reimburse the employee for medical care expenses incurred through December 31, 2020.

Carryover Limit:

IRS Notice 2020-33 increases the health FSA carryover limit for unused funds remaining at the end of a plan year from $500 to $550 to reflect indexing for inflation. This change is effective for plan years beginning in 2020 (and reflects the maximum amount that may be carried over to the immediately following plan year beginning in 2021).

As the plan sponsor, what are your options?

  • You can choose to do nothing.  While employees would certainly appreciate the additional flexibility, it may be an administrative burden under the circumstances to conduct an off-cycle open enrollment period – unless of course your regular open enrollment period is approaching in June or July. 
  • If you want to allow any changes, choose an effective date (i.e., July 1st) and decide what changes you would like to allow:
    • For employer-sponsored health coverage, allow employees to make a new election if the employee previously declined coverage, revoke an existing election and enroll in different health coverage sponsored by the employer, or revoke an existing election if the employee is or will be enrolled in other health coverage.
    • For health FSAs and DCAPs, allow employees to revoke an election, make a new election, or decrease or increase an existing election on a prospective basis.
    • Offer an extended period for incurring health FSA or DCAP expenses until the end of 2020.
    • If your health FSA has the $500 carryover limit, increase the maximum to $550.
  • Employers that make any of these changes must amend their plan documents by December 31, 2021.

Below are copies of the actual notices from the IRS and an overview from JGS:

JGS Overview – IRS Provides More Options for Unused Funds in Health FSAs and DCAPs

JGS Overview – Guidance for Section 125 Mid-year Election Change Rules

New Section 125 Rules – Notice 2020-29

New Section 125 Rules – Notice 2020-33

This information is hot off the press and it’s complicated, so please contact us with any questions and let’s discuss next steps.

 

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