The U.S. Internal Revenue Service (IRS) on May 12, 2020, provided relief for Section 125 cafeteria plans (cafeteria plans) through the simultaneous release of Notice 2020-29 and Notice 2020-33. The notices provide additional flexibility to participants, including those experiencing unanticipated changes due to the coronavirus (COVID-19) crisis. The relief includes (i) temporary flexibility for midyear elections under cafeteria plans, (ii) temporary extended periods to incur claims for certain health and dependent care flexible spending accounts (FSAs) and (iii) increased health FSA carryover limits. The guidance also clarifies the relief the IRS provided earlier this year regarding first-dollar COVID-19 and telehealth services under high-deductible health plans (HDHPs). Unlike recent retirement plan guidance, the relief provided by the notices is not limited to individuals who certify that they are affected by COVID-19. Below is a summary of the key provisions of the notices that are relevant to employers. All of the cafeteria plan changes permitted by the notices are optional; a plan sponsor can decide which changes, if any, will be made under its plan.
Temporary Flexibility for Midyear Elections Under Cafeteria Plans
Notice 2020-29 allows employees to make special midyear elections under cafeteria plans during 2020 for employer-sponsored health coverage, health FSAs and dependent care FSAs. Under current rules, elections regarding benefits under a cafeteria plan must be made prior to the first day of the plan year and then generally are irrevocable during that plan year. Midyear changes to such elections are permitted only under certain circumstances, such as a change in status or a significant change in the cost of coverage. Recognizing that employees may need to change their elections for additional reasons due to the COVID-19 crisis, Notice 2020-29 provides that an employer may amend its cafeteria plan to allow eligible employees to make prospective midyear elections and changes to existing elections during 2020 as follows:
- with respect to employer-sponsored health coverage under insured and self-insured plans,
- elect coverage prospectively, if the employee initially declined such coverage
- change an existing election to enroll in different health coverage under the employer’s plan prospectively (including changing enrollment from self-only coverage to family coverage)
- prospectively revoke an existing election for health coverage, provided that the employee attests in writing that s/he is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer (the employer may rely on the written attestation, unless the employer has actual knowledge to the contrary)
- revoke an election, make a new election or decrease or increase an existing election regarding a health FSA (including a limited-purpose health FSA) or dependent care FSA, in each case, on a prospective basis
Employers are not required to provide unlimited election changes but may, in their discretion, determine the extent to which election changes are permitted (such as limiting midyear elections to amounts no less than amounts already reimbursed under a health FSA or limiting the number of election changes that can be made during 2020 under this special rule) provided that the changes do not result in failure to comply with the applicable nondiscrimination rules. For example, the IRS notes that to avoid adverse selection of health coverage, an employer could decide to allow only election changes that would result in improvements in coverage, such as moving from self-only to family coverage or from a low-option plan covering in-network expenses only to a high-option plan covering expenses in or out of network.
Temporary Extended Claims Periods for Certain Health and Dependent Care FSAs
Notice 2020-29 acknowledges that the COVID-19 crisis has caused unanticipated changes to the availability of and need for healthcare and dependent care. As a result, employees may be more likely to have unused health or dependent care FSA funds at the end of a grace period or plan year ending in 2020. To alleviate these surpluses, the notice provides that an employer may elect to amend its plan to allow unused amounts in health and dependent care FSAs as of the end of a grace period ending in 2020 to be applied to medical care expenses and dependent care expenses, respectively, incurred through December 31, 2020. Similarly, in the case of a cafeteria plan maintained on a non-calendar-year basis, an employer may allow unused amounts in health and dependent care FSAs to be applied for expenses incurred through December 31, 2020. Employers should be aware that such extended periods constitute disqualifying coverage for employees enrolled in an HDHP, making such employee ineligible to make contributions to a health savings account during the extended period unless the employee’s health FSA is (or is amended to be) a limited purpose FSA, as opposed to a general purpose FSA.
Clarification of Relief for HDHPs
Finally, Notice 2020-29 clarifies that the relief the IRS issued in March, as well as relief provided in Section 3701 of the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act), to allow HDHPs to cover COVID-19 testing and treatment and telehealth services (including services unrelated to COVID-19) without satisfaction of minimum deductibles applies retroactively to January 1, 2020. Previously, the relief could have been interpreted as applying only after the March issuance of the applicable guidance.
Increased Health FSA Carryover Limit
In conjunction with Notice 2020-29, the IRS also issued Notice 2020-33, which increases the carryover limit of unused amounts in a health FSA from a set dollar amount of $500 to 20 percent of the maximum health FSA contribution under section 125(i) of the Internal Revenue Code for the same year (as indexed). This means that an employer may amend its plan to allow a carryover of up to $550 in unused amounts for a plan year beginning in 2020 (to be carried over to 2021), with this $550 maximum indexed in future years for inflation.
Employers must decide which of these elective cafeteria plan changes, if any, they wish to adopt and any limitations to be imposed on the provided relief. Employers implementing the changes must adopt a plan amendment by December 31, 2021, but the amendment may be effective retroactively to the date the changes are made effective. In addition, employers must communicate these changes to participants. Although neither Notice 2020-29 nor Notice 2020-33 indicates when and how such changes need to be communicated, given that most of the participant relief is temporary, participants should be notified of the plan changes as soon as practicable. It seems reasonable to assume that the guidance applicable to benefit plans described in Notice 2020-01, for example, which permits electronic communications to plan participants who are reasonably believed to have effective access thereto, applies.
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