On May 12, the IRS issued revised administrative rules in the wake of the Covid-19 pandemic affecting the following types of plans/policies:
- Cafeteria plans, Section 125 plans
- Flexible spending accounts, FSAs
- Dependent care assistance plans, DCAPs
- Qualified High deductible health plans, HDHPs
The guidance permits 2020 mid-year election changes for health coverage, FSAs, and DCAPs. The IRS also permits employers to extend claim periods for employees to apply unused FSA or DCAP funds through December 31, 2020. In addition, the dollar carryover limit for FSAs has been increased from $500 to $550. Finally, the changes clarified certain HDHP relief during the crisis that applies back to January 1, 2020.
The changes were published in IRS Notices Notice 2020-29, at https://www.irs.gov/pub/irs-drop/n-20-29.pdf and 2020-33, at https://www.irs.gov/pub/irs-drop/n-20-33.pdf.
An employer, although not required to do so, may amend its plan to allow employees to
- Revoke an election
- Make a new election, or
- Change the amount of an existing election.
In addition, new rules are being made available regarding carryover of prior-year funds remaining in FSA accounts. Normally, employers sponsoring Health FSA plans must choose between allowing
- a 2½-month grace period in the succeeding year to spend down qualifying expenditures or
- up to $500 (now $550) of the prior year’s expenditures to be rolled over and applied during the full 12 months of the succeeding year.
For 2020, employers may elect to extend the 2½-month grace period for all of 2020. Also, employers with the limited rollover, may permit a larger carryover through 12/31/2020.
Please note that extending these limitations could impact an employee’s HSA eligibility.
TPAs (such as WageWorks & Ameriflex) will provide further clarity on how employers can implement the plan amendments.
Plan Amendments and Employee Notifications
The plan amendments to put the changes into effect, must be made before 2022, and may be retroactively effective to 1/1/2020. Also, employee notifications are required for any changes made to these benefit plans.
Employer-sponsored Health Coverage
The IRS guidance opens up the possibility that an employee could alter health plan elections outside of the normal “qualified life event” scenarios in the following ways:
- If the employee had previously declined coverage, he or she may make a new election for employer-sponsored health coverage.
- Employees may change an existing election for employer-sponsored health coverage.
- If the employee promises to enroll in other coverage, he or she may revoke an existing election for employer-sponsored health coverage. That promise must be attested to in writing.
Employers are not required to permit unlimited election changes and may impose limitations, provided they are prospective and do not violate any applicable nondiscrimination rules. Also, employers may restrict changes to those that increase or otherwise improve coverage. This is to reduce the likelihood of adverse selection. If employees are permitted to revoke their coverage, the employer must, as noted above, get an affidavit signed by the employee that he or she is obtaining coverage elsewhere.
Before making these permissive changes, employers are cautioned to make sure their carriers, TPAs, and other relevant service providers will accommodate the changes.
The guidance also provides additional guidance regarding earlier relief for HDHPs to cover Covid-19 treatment and the temporary exemption for telehealth services.
B. Conley, D Dygert, J. Kraft, and J Sellstrom, “All Bets Are Off: IRS Issues New Playbook for Section 125 Plans During Pandemic”, Seyfarth, at https://www.seyfarth.com/news-insights/all-bets-are-off-irs-issues-new-playbook-for-section-125-plans-during-pandemic.html (5/13/20)
A. Gordon, S. Nash, M Garcia, “New IRS Guidance Provides Employers with Section 125 Plan Flexibility During 2020”, Winston & Strawn, LLP, at https://www.winston.com/en/benefits-blast/new-irs-guidance-provides-employers-with-section-125-plan-flexibility-during-2020.html (5/18/20)