By: HUB’s EB Compliance Team
In recognition of the COVID-19 pandemic, the IRS is providing additional flexibility for cafeteria plan elections. Much of this reflects what employers may have done already in response to the pandemic, but may not have been permitted under existing guidance.
Under Notice 2020-29, the IRS is now allowing the more flexibility for election changes during calendar year 2020. Specifically, employees may:
- make a new election to enroll in the employer’s plan, if the employee initially declined to enroll;
- change to a different health coverage option or tier sponsored by the same employer (such as moving to a different plan or changing from single to family coverage);
- unenroll from the employer’s plan, if the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer (including coverage through a spouse or on an ACA exchange – the IRS notice has a sample attestation);
- enroll in, drop, or change the elected amount for a health flexible spending account (“FSA”); and
- enroll in, drop, or change the elected amount for a dependent care FSA.
All these changes only apply on a going-forward basis, meaning there are no retroactive changes here. However, to the extent employers allowed these elections earlier this year, they can retroactively amend their plan to reflect what they have allowed. This is helpful since many insurance carriers did provide flexibility for employees joining or leaving plans earlier this year.
First, employers are not required to allow any of these changes. They may adopt some or all of them, but they do not have to.
Second, employers may put limits on making these changes, such as requiring elections within a certain period of time after they are adopted or only allowing employees to elect more favorable employer coverage rather than any employer coverage. Additionally, for the health and dependent care FSAs, employers may require that an election cannot be reduced below amounts already reimbursed.
- As noted, these are permitted not required. Employers should be concerned about the potential for adverse selection in opening up these election opportunities and may want to provide limitations on these election changes to minimize that risk.
- Employers should check with their insurance carriers (for insured health plans) and third party administrators and stop loss carriers (for self-funded plans) before implementing these changes with respect to health plans.
- Similarly, employers should confirm with their administrators for the health and dependent care FSA plans that they can administer these mid-year changes.
- Any changes should be reflected in timely plan amendments. The guidance allows employers to adopt amendments through the end of 2021, retroactively as far back as January 1, 2020.
FSA Deadline Flexibility
Additionally, under Notice 2020-29, the IRS is also allowing FSAs to reimburse expenses incurred through 2020 under health and dependent care FSAs. This only applies if an FSA had a grace period or plan year that ended in 2020. Therefore, calendar year FSAs with no grace period are not eligible for this relief.
Under this relief, an FSA with a grace period ending in 2020 or with a plan year ending in 2020 may reimburse expenses incurred through the end of 2020. For example, assume an employee is in a calendar year FSA with a grace period had $1,000 unused at the end of 2019. Prior to this guidance, that $1,000 could be used to reimburse expenses incurred through March 15, 2020. Now, it can be used for expenses incurred through December 31, 2020.
Like with the election changes, this is not required. Additionally, if the health FSA is a general purpose FSA (as in, it is not compatible with a health savings account (“HSA”)), then extending this timeframe to incur expenses will make anyone covered under the plan ineligible to contribute to an HSA.
- Employers sponsoring high deductible health plans (“HDHPs”) with HSAs should weigh the impact of HSA-ineligibility on extending the ability to incur expenses.
- Before adopting this for dependent care FSAs, consult with your administrator regarding how this extended deadline will impact dependent care FSA reporting.
- Any changes should be reflected in a plan amendment. The guidance allows employers to adopt amendments through the end of 2021, retroactively as far back as January 1, 2020.
Notice 2020-29 also clarifies that testing and treatment for COVID-19 and any other items that are required to be covered with zero cost sharing under the various coronavirus response bills are permitted under HDHPs. Additionally, employees may also receive telehealth services (whether or not for COVID-19) prior to meeting the deductible. This means that employees in those plans can continue to contribute to HSAs. This applies back to January 1, 2020 (or whatever date such coverage is required). While this clarification may not have been, strictly speaking, necessary, it is helpful IRS confirmation.
Health FSA Carryover Increased
Finally, the IRS has increased the carryover amount for health FSAs. The IRS previously allowed health FSAs to provide a carryover of up to $500 into the following plan year. In other words, instead of two-and-half-month a grace period, the plan could allow employee to use for a year up to $500 (or a lower limit specified in the plan) that were not spent in the prior year. For example, if an employee elected $2,000 in the health FSA in 2020, but was only reimbursed $1,500 for 2020, the employee could use the remaining $500 for expenses in 2021.
Notice 2020-33 increases the carryover limit to 20% of the maximum health FSA annual limit ($2,750 for 2020). This means, for 2020, the carryover limit can be as high as $550. In future years, this amount will be adjusted as the health FSA limit is adjusted. To be clear, this does not allow plans to adopt an amendment now to increase the carryover from the 2019 plan year; it only applies to plan years that end in 2020 and going forward.
Generally, any change in the carryover limit must be adopted before the end of the plan year. However, for this one time, the IRS is allowing plans to adopt the amendment on or before December 31, 2021 and make it retroactively effective as far back as January 1, 2020. However, to take advantage of this, the employer must inform all eligible individuals of this change to the plan promptly.
- Employers looking to increase this carryover should confirm with their health FSA administrator that they can support the increased limit.
- If desired, employers should make sure any amendment automatically incorporates annual increases to the carryover. Otherwise, they will need to amend every year to reflect the increase.
For the latest information on the COVID-19 crisis and its effect on employers, please keep visiting HUB’s Coronavirus Resource Center. If you have any questions, please contact your HUB Advisor. You can also view more compliance articles in our Compliance Directory.
NOTICE OF DISCLAIMER
The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.