The Internal Revenue Service (IRS) released new guidance, Notice 2020-29, providing increased flexibility for individuals participating in section 125 cafeteria plans, health flexible spending arrangements (FSAs) and dependent care assistance programs (DCAPs) to make mid-year changes.
Typically, participants are rarely permitted to make mid-year changes, but the guidance provides certain flexibility, including election changes and an extended claims period. A different IRS notice increases the carryover limit for unused FSA funds.
Elections Under a Section 125 Cafeteria Plan
Elections for qualified benefits under a section 125 cafeteria plan are generally irrevocable and must be made before the first day of a plan year, except for under limited circumstances, such as a change in an employee’s status or a significant increase in the cost of coverage.
However, due to the COVID-19 public health emergency, employees can now make certain prospective mid-year election changes for employer-sponsored health coverage, health FSAs and DCAPs during calendar year 2020 as long as the plan chooses to permit it, regardless of whether the traditional required criteria applies. Specifically, an employer may, at its discretion, amend its section 125 cafeteria plans to allow employees to:
- Make a new election for employer-sponsored health coverage on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage;
- Revoke an existing election for employer-sponsored health coverage and make a new election to enroll in different employer-sponsored health coverage on a prospective basis (including changing enrollment from self-only coverage to family coverage);
- Revoke an existing election for employer-sponsored health coverage on a prospective basis, if the employee attests in writing that they’re enrolled or will enroll in other health coverage not sponsored by the employer (Notice 2020-29 provides an example written attestation);
- Revoke an election, make a new election, or decrease or increase an existing election regarding a health FSA on a prospective basis; and
- Revoke an election, make a new election or decrease an existing election regarding a DCAP on a prospective basis.
Extended Claims Period for Health FSAs and DCAPs
Notice 2020-29 also provides flexibility for a section 125 cafeteria plan to provide an extended period to apply unused amounts remaining in a health FSA or a DCAP. Specifically, an employer, at its discretion, may amend one or more of its section 125 cafeteria plans to permit employees to:
- Apply unused amounts remaining in a health FSA
or a DCAP, which has the last day of its grace period in 2020 or a plan year
ending in 2020, to pay or reimburse expenses incurred for the same qualified
benefit through December 31, 2020.
- Example: If a health FSA has a calendar year plan and provides a grace period ending March 15 immediately following the end of each plan year, the employer may amend the plan to allow employees to apply unused amounts in their FSAs as of March 15, 2020, to reimburse the employee for medical care expenses incurred through December 31, 2020.
High-Deductible Health Plan Coverage for Telehealth
Notice 2020-29 also applies earlier relief for high deductible health plans (HDHPs) to cover expenses related to COVID-19 and a temporary exemption for telehealth services retroactively to January 1, 2020. Specifically, participants with coverage under an HDHP may receive coverage for telehealth and other remote services outside the HDHP and can do so without being required to satisfy the HDHP deductible (consistent with previously issued Notice 2020-15 regarding HDHPs and Expenses Related to COVID-19). This relief applies retroactively to reimbursements of expenses incurred on or after January 1, 2020.
Increased Carryover Limit for Unused Health FSA Funds
A different guidance document, Notice 2020-33, increases the current $500 carryover limit for unused health FSA amounts, to a maximum of $550, as adjusted annually for inflation. It also clarifies a health plan’s ability to reimburse individual insurance policy premium expenses incurred before the beginning of the plan year for coverage provided during the plan year.
If an employer decides to amend one or more of its section 125 cafeteria plans to provide for any elections allowed under Notice 2020-29, and/or amend its health FSA for unused carryover funds under Notice 2020-33, it must adopt a plan amendment. A 2020 plan year amendment must be adopted on or before December 31, 2021, and may be effective retroactively to January 1, 2020, done in accordance with the Notice 2020-29 and/or Notice 2020-33.