Last week, the Internal Revenue Service (“IRS”) issued guidance for cafeteria plans subject to Section 125 of the Internal Revenue Code of 1986, as amended (“Code”) that for 2020:
- significantly relaxes prior restrictions on mid-year election changes for employer-sponsored health coverage and health and dependent care flexible spending accounts (“FSAs”),
- allows unused 2019 FSA balances that were forfeited to be reinstated and used to reimburse qualifying medical or dependent care expenses, as applicable, through December 31, 2020, and
- minimally increases the maximum permitted health FSA carryover amount from $500 to $550.
The IRS issued the guidance described in the first two bullets above to “assist with the nation’s response to the 2019 Coronavirus outbreak (COVID-19),” although the guidance is not limited to individuals who are affected by COVID-19
Pursuant to Notice 2020-29, during 2020 an employer may provide employees with a new mid-year election opportunity to do one or more of the following:
- 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 health coverage sponsored by the same employer 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, provided that the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer (Notice 2020-29 provides a model attestation that employees may use. The employer may rely on such attestation so long as the employer does not have actual knowledge the employee is not, or will not be, enrolled in other comprehensive health coverage.); and
- make a new election, or decrease (including to zero) or increase an existing FSA or a DCAP election on a prospective basis.
An employer may determine the extent to which such election changes are permitted and applied, provided that any permitted election changes are applied on a prospective basis only, and the changes to the 125 plan’s election requirements do not result in failure to comply with the nondiscrimination rules applicable to cafeteria plans. Employers may restrict FSA changes to amounts no less than amounts already reimbursed (e.g., if an employee has elected $1,000 in an FSA and already received $800 of reimbursement, the employer can provide that the employee can elect to reduce his or her election to $800). To prevent adverse selection of health coverage, an employer may wish to limit elections to circumstances in which an employee’s coverage will be increased or improved as a result of the election (e.g., by electing to switch from self-only coverage 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). Employers should also confirm that election changes with respect to any employer-sponsored health insurance will be permitted by the insurers for any insured benefits and stop-loss insurers for any self-funded benefits.
Notice 2020-29 also allows an employer to reinstate unused and forfeited 2019 health and/or dependent care balances following a claims reimbursement period ending in 2020 and allow those amounts to be used to reimburse qualifying health and dependent care expenses, as applicable, incurred through December 31, 2020. Employers who sponsor high deductible health plans (“HDHPs”) and allow employees to contribute to Health Savings Accounts (“HSAs”) should consider that reinstating general health FSA balances during 2020 will cause employees enrolled in HDHPs to be ineligible to contribute to their HSAs.
Notice 2020-33 increases the health FSA carryover limit (currently $500 of unused amounts remaining as of the end of the FSA plan year) that may be used to pay for, or reimburse a participant for, qualifying medical expenses incurred during the following plan year. This carryover amount does not count against the maximum annual limit under Code Section 125(i) for employee salary reduction contributions to a health FSA (currently $2,750). Notice 2020-33 increases the maximum $500 carryover amount for a plan year to an amount equal to 20% of the maximum salary reduction contribution under Section 125(i) for that plan year. By statute, the increase to the Code Section 125(i) limit is rounded to the next lowest multiple of $50, increases to the maximum carryover amount, as the result of that indexing, will be in multiples of $10 (20% of any $50 increase to the Code Section 125(i) limit). Consequently, the maximum unused amount from a plan year starting in 2020 allowed to be carried over to the immediately following plan year beginning in 2021 is $550 (20% of $2,750, the indexed 2020 limit under Code Section 125(i)). The notice does not allow an increase in the carryover amount from the 2019 plan year.
If an employer elects to implement any of the above permitted changes, it must amend its cafeteria plan to do so no later than December 31, 2021 and may be retroactive to January 1, 2020.