Alston & Bird LLP and Aflac
This year, many employees are finding out that their health and dependent care needs are different from what they anticipated for 2020 due to the COVID-19 public health emergency and its related economic impact. Under normal circumstances, employers are limited by IRS rules, which generally prohibit mid-year changes to cafeteria plan elections for employer-sponsored health coverage and flexible spending account contributions, except in certain limited circumstances such as marriage or the birth or adoption of a child. In light of the unexpected changes from COVID-19, the IRS released Notice 2020-29 to provide employers flexibility to allow additional mid-year cafeteria plan health coverage and FSA election changes, as well as other relief. In addition, Congress is considering further changes related to election changes. This article provides a high-level summary of these new options in the IRS notice for employers.
New flexibility for cafeteria plans and FSAs
Notice 2020-29 is intended to provide employers with additional flexibility with respect to cafeteria plan health coverage elections and the use of FSA funds. Employers may choose whether to adopt any, some or none of the new options.
Permitted changes to cafeteria plan elections for health coverage and FSA contributions
The notice allows certain cafeteria plan salary reduction election changes related to health coverage and FSAs, for mid-year elections made in calendar year 2020 only.
For health plan enrollment, an employer may allow employees to make the following changes in calendar year 2020. These changes are allowed even if the employee hasn’t experienced a qualifying event that would normally allow a change in election. These changes may be made on a prospective basis only.
With respect to health FSAs and dependent care assistance programs (DCAPs), in calendar year 2020, an employer may allow employees to prospectively enroll, increase, decrease or revoke their elections for any reason.
Extension of grace period for health FSAs and DCAPs for plan year or grace period ending in calendar year 2020
Normally, health FSAs and DCAPs may have a grace period for expenses of up to 2 ½ months after the end of the plan year. Any unused amounts remaining at the end of the plan year may be used to pay expenses incurred for the same benefits during the grace period. Whether to have a grace period and the length of any grace period (subject to the 2 ½ month limit) are matters of plan design. Alternatively, a health FSA may allow a limited amount of unused benefits to carry over into the next plan year. A health FSA cannot have both a grace period and allow a carryover.
Under the new guidance, a health FSA or DCAP with a grace period or plan year ending in 2020 may permit reimbursement of expenses incurred through Dec. 31, 2020.
There are special issues to consider for employers that have high deductible health plans (HDHPs):
Plan amendments required by Dec. 31, 2021
An employer that adopts any of the new options, or that increases the health FSA carryover limit to $550 for plan years starting in 2020, must adopt a plan amendment by Dec. 31, 2021.
The relief options provided with respect to cafeteria plans and FSAs for 2020 may be useful tools for employers who are helping their employees deal with changing circumstances due to COVID-19. What will work best may vary based on the circumstances and each employer should consult with their own advisers. Congress is also considering additional changes, including allowing increased carryovers for health FSAs and DCAPs from 2020 to 2021 and allowing more extended grace periods. An update will be provided on any further developments.
The information above is provided for general informational purposes and is not provided as tax or legal advice for any person or for any specific situation. Employers and employees and other individuals should consult their own tax or legal advisers about their situation.
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