COVID-19 health plan and cafeteria plan relief

The IRS has issued a pair of notices providing additional relief for employers’ cafeteria plan offerings, including health insurance, health FSAs, and dependent care FSAs.

May 20, 2020

The IRS has issued a pair of notices providing additional relief for employers’ cafeteria plan offerings, including health insurance, health FSAs, and dependent care FSAs, and expansion of permissible expenses of high deductible health plans (HDHPs). The notices reflect changes made because of the CARES Act, FFCRA, and executive orders related to the COVID-19 pandemic. See IRS news release IR-2020-25 for a brief summary.

Health FSA carryover increase and HRA clarification (Notice 2020-33)

Health FSAs have a “use or lose” feature in which employees must use funds in the account for qualified expenses or lose the funds. Plans may optionally provide a grace period in which participants may apply unused funds for expenses incurred in the first two and a half months of the following plan year (by March 15 for calendar year plans). Alternatively, plans may allow participants to carryover a limited amount of unused funds to use for expenses in the next plan year. A plan may have a grace period or a carryover period, but not both. Also, these options shouldn’t be confused with the run-out period, the timeframe for submitting expenses after a year closes.

Notice 2020-33 increases the health FSA carryover amount to 20% of the inflation-adjusted maximum health FSA contribution amount. Accordingly, the carryover amount for 2020 is increased from $500 to $550, which is 20% of the maximum health FSA contribution amount of $2,750. Plans must be amended to adopt this change (see “amending plans” later).

The notice also clarifies that an individual coverage health reimbursement arrangement (HRA) may reimburse premiums for coverage starting during the plan year (January 1, for example) even if the covered individual paid for the premium prior to the start of the plan year.

Mid-year cafeteria plan election changes (Notice 2020-29)

Employers have temporary flexibility to amend one or more of their §125 cafeteria plans to allow employees to make mid-year elections regarding their participation in employer-sponsored health plans, health FSAs, or dependent care benefit (DCB) programs.

Plans may be amended to allow an eligible employee to:

  • Elect to participate in an employer-sponsored health plan if the employee initially declined coverage.
  • Switch to different employer-sponsored coverage, such as from self-only to family coverage.
  • Revoke an election in order to enroll in other coverage, such as a spouse’s employer’s plan (the employee must attest in writing that they have or will enroll in other coverage)
  • Elect, revoke an election, or increase or decrease health FSA participation.
  • Elect, revoke an election, or increase or decrease participation in employer dependent care benefits.

Employees do not have to meet regulatory special enrollment requirements, such as a change in marital status, to qualify for this relief. Employers may limit the extent to which election changes are permitted but all changes must be prospective and non-discrimination rules must be adhered to.

Extended claims period for FSAs (Notice 2020-29)

Employers also have flexibility to amend health FSAs and dependent care assistance programs, such as dependent care FSAs, to apply unused amounts to pay or reimburse expenses for an extended period. Specifically, employers may allow employees to apply amounts unused at the end of a 2020 grace period or at the end of a plan year ending in 2020 to pay or reimburse qualified expenses incurred through December 31, 2020. For example, a calendar year health FSA plan with a grace period ending March 15, 2020, may be amended to allow an employee to use unused funds to pay or reimburse medical expenses incurred through December 31, 2020.

Amending plans (Notices 2020-29 and 2020-33)

An employer must adopt a plan amendment to implement any of the changes discussed in either of the notices. Amendments for 2020 plan years must be adopted on or before December 31, 2021, and may be generally effective retroactive to January 1, 2020, provided the plan operates in accordance with the two notices and employees are informed of the changes. Any amendment adopted for this purpose must apply only to mid-year elections made during calendar year 2020, or to an extended period to apply unused health FSA amounts or dependent care assistance program amounts for the payment or reimbursement of medical care expenses or dependent care expenses incurred through December 31, 2020.

For more information on COVID provisions for businesses, see "Business assistance for COVID-19 (FFCRA & CARES Act)"

Originally published in the May 20, 2020 edition of TAX in the News.

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