IRS Expands Flex Plan Options for Mid-Year Changes
On May 12, 2020, the Internal Revenue Service (IRS) released two notices providing relief for 2020 cafeteria plans and related benefit issues in light of the COVID-19 national emergency. Notice 2020-29 focuses on permissible mid-year election changes under § 125 of the Internal Revenue Code and Notice 2020-33 focuses on allowable carryover provisions for a health flexible spending account (HFSA). The key points are summarized below:
- 125 Mid-Year Election Changes
During calendar year 2020, the employer’s cafeteria plan may allow employees to make the following mid-year changes on a prospective basis even if the employee has not experienced a trigger event such as a family status change:
- Elect group health coverage if initially declined.
- Change election to a different group health coverage option sponsored by the same employer.
- Drop group health coverage, provided that the employee attests that they are enrolled in (or will immediately enroll in) other health coverage that is not sponsored by the same employer. See Notice 2020-29 for a sample employee attestation.
- Change election to start or stop participating in the HFSA, or change the election amount.
- Change election to start or stop participating in a Dependent Care Assistance Program (DCAP), or change the election amount.
The employer’s plan may adopt some or all of the provisions, but any provisions must apply uniformly to all participants. The § 125 nondiscrimination rules continue to apply.
Employers may begin administering new provisions immediately, provided all participants are informed. The plan also must be amended, but the amendment for 2020 changes may be adopted as late as December 31, 2021 and apply retroactively to January 1, 2020.
FSA Grace Periods
For employees who have an unused HFSA or DCAP balance at the end of the grace period or the plan year that ends in 2020, the plan may allow reimbursement of eligible expenses that are incurred through December 31, 2020.
For instance, many calendar-year FSAs include a grace period, allowing the 2019 plan to reimburse eligible expenses incurred through March 15, 2020. Or a non-calendar year plan year may run June 1, 2019 through May 31, 2020 with a grace period through August 15, 2020. If the plan adopts this change, eligible expenses incurred through December 31, 2020 would be reimbursable.
Caution: A general-purpose HFSA will interfere with participant’s eligibility to make contributions to a health savings account (HSA).
Prior IRS guidance and the federal Coronavirus Aid, Relief, and Economic Security Act (CARES Act) provide that high deductible health plans (HDHPs) must cover COVID-19 testing at 100 percent without deductibles. HDHPs also may provide first-dollar coverage of COVID-19 treatment. Notice 2020-29 clarifies that these changes may apply retroactively to January 1, 2020 and they do not interfere with the employee’s eligibility to contribute to an HSA. Telehealth and remote care are included.
The maximum allowable HFSA carryover is increased from $500 to $550 for plan year 2020.
The employer’s plan may make this change if all participants are informed. The amendment may be adopted as late as December 31, 2021 and apply retroactively to January 1, 2020.
Individual Coverage Health Reimbursement Arrangement (ICHRA)
An ICHRA is designed to reimburse an employee’s individual health insurance premiums. The IRS clarifies that the ICHRA may reimburse premiums the employee pays before the ICHRA plan year starts if they are for insurance coverage during the plan year. For instance, if the employee paid a premium in December 2019 for coverage that started January 2020, the premium is reimbursable from the 2020 ICHRA.
The § 125 rules for cafeteria plans prevent employees from making mid-year election changes except in limited cases. The COVID-19 pandemic has caused massive upheaval in employment status and family needs, however, so the IRS Notices allowing employers to change many of the rules are welcome relief. Employers will want to work with their advisors to review the material and consider whether to adopt any of the newly-allowed provisions.
Employers that want to expand opportunities for employees to change their health coverage elections are advised to ensure that any group insurance policies (or stop-loss insurance in the case of self-funded coverages) adopt the same provisions. The IRS notices are optional so carriers are not required to amend their current election change rules (unless required by state law or order).
Also note that allowing employees to change or stop their HFSA or DCAP contributions sounds flexible and easy. But employers may want to limit HFSA changes to certain dollar amounts to prevent employees who have already used most or all of their 2020 benefit, which could be as much as $2,750, from stopping their contributions for the rest of the year.
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