Cafeteria Plan Election Changes and Claim Extensions – A COVID-19 Update
On May 12, 2020, the Internal Revenue Service (IRS) released guidance, in the form of Notices 2020-29 and 2020-33, that allows employers to provide, at their option, temporary relief for section 125 cafeteria plan participants and would-be participants. Internal Revenue Code section 125 permits employers to pass through part of the cost of health coverage and other welfare benefit premiums to employees on a pre-tax basis. These arrangements frequently also include pre-tax healthcare and dependent care assistance flexible spending accounts (FSAs). The guidance issued addresses unanticipated changes arising due to the current COVID-19 pandemic and provides that previously-provided relief for high deductible health plan/HSA programs may be applied retroactively to January 1, 2020. It also increases the $500 permitted carryover amount for health FSAs to $550 on account of inflation indexing.
Notice 2020-29 provides greater flexibility including:
- Extension of claims periods for cafeteria plan participants to apply unused amounts remaining in a healthcare or dependent care assistance FSA for expenses incurred for those same qualified benefits through December 31, 2020 which is quite helpful for participants in non-calendar year cafeteria plans who have had to delay medical, dental or vision treatment or keep their children at home due to closed daycare facilities on account of the COVID-19 pandemic.
- Expansion of the ability of employees to make mid-year elections for health coverage, healthcare, and dependent care assistance FSAs, in connection with changed needs as a result of the COVID-19 pandemic.
- Generally, cafeteria plan elections are made prior to the beginning of the plan year and are irrevocable during the plan year but mid-year election changes are permitted for certain “change in status” events (i.e., termination of employment, change in family status, etc.). Cafeteria plan sponsors now may permit prospective mid-year election changes prior to the plan’s next open enrollment period for health coverage for employees who initially declined coverage for this plan year and for currently enrolled employees to switch coverage options, add family members, or drop coverage (if they certify in writing they are or will immediately enroll in other health coverage). The IRS has provided a model certification for this purpose.
- Mid-year election changes to a healthcare or dependent care assistance FSA also are allowed, given employees’ limited access to routine health care, and school and daycare closures that have affected employees’ dependent care assistance needs. Plans may permit prospective mid-year changes in 2020 to revoke or make new elections, or change existing elections, under these programs.
- In operation, the IRS has effectively waived any Section 125-based restrictions on mid-year enrollment (or disenrollment) for health coverage.
- Applying earlier relief for high deductible health plan/HSA programs to cover expenses related to COVID-19 such as testing, and a temporary exemption for telehealth services retroactive to January 1, 2020, without jeopardizing a taxpayer’s ability to make deductible contributions to an HSA.
Notice 2020-33 responds to Executive Order 13877, which directs the Secretary of the Treasury to “issue guidance to increase the amount of funds that can carry over without penalty at the end of the year for flexible spending arrangements.” The notice increases the limit for unused healthcare FSA carryover cap amounts from $500, to a maximum of $550, as adjusted annually for inflation. For 2020, the Healthcare FSA per employee maximum is $2,750 — this guidance would permit a plan to increase the 2020 rollover amount up to $550. The deadline to implement this increase, by written plan amendment is the last day of the plan year.
Employers must notify eligible employees of plan changes made under the temporary rules, most practically, through the release of a summary of material modifications (SMM) or similar document. Plan amendments for these optional changes must be adopted by December 31, 2021, and can be retroactive to January 1, 2020, so long as the subject plan is operated in accordance with the guidance.