IRS Notice 2020-29 creates new mid-year election change events. In general, elections to participate in qualified benefits under a Section 125 cafeteria plan (Cafeteria Plan) generally must be irrevocable and must be made prior to the first day of the plan year, except under certain circumstances, such as if the employee experiences a change in status or there are significant changes in the cost of coverage.
In response to COVID-19, the IRS has increased flexibility in Cafeteria Plan rules as follows:
An employer may amend its Cafeteria Plans to temporarily allow eligible employees to make prospective election changes (until the end of 2020), including:
- 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;
- revoke an election, make a new election, or decrease or increase an existing election regarding a health Flexible Spending Account (FSA) or limited purpose FSA on a prospective basis; and
- revoke an election, make a new election, or decrease or increase an existing election regarding a dependent care assistance program on a prospective basis.
To accept an employee’s revocation of an existing election for employer-sponsored health coverage, the employer must receive from the employee an attestation in writing that the employee is enrolled, or immediately will enroll, in other comprehensive health coverage not sponsored by the employer. The IRS has included an example of an acceptable written attestation in IRS Notice 2020-29.
An employer is not required to provide unlimited election changes but may determine the extent to which such election changes are permitted and applied at its discretion, provided that any permitted election changes are applied on a prospective basis only, and the changes to the plan’s election requirements satisfy nondiscrimination rules applicable to Cafeteria Plans.
This relief may be applied retroactively to periods prior to the issuance of the notice and on or after January 1, 2020.
Extended Claims Period for FSAs and DCAPs
Further, IRS Notice 2020-29 allows Cafeteria Plan to provide an extended period to apply unused amounts remaining in an FSA (health or limited purpose) or Dependent Care Flexible Spending Account Plan (DCAP) to pay or reimburse medical care expenses or dependent care expenses.
Under the guidance, an employer may amend its plans to permit employees to apply unused amounts remaining in an FSA or DCAP, at its discretion, as of the end of a grace period ending in 2020 or a plan year ending in 2020 to pay or reimburse eligible expenses incurred through December 31, 2020.
For example, if an employer’s FSA provides for a grace period ending on March 15, 2020, the employer may amend the plan to permit employees to apply unused amounts remaining in the FSA at such time, to reimburse the employee for eligible expenses incurred through December 31, 2020.
Note for Employers with High Deductible Health Plans (HDHPs).Employers considering making the FSA extension described above who also provide access to a Health Savings Account (HAS) should note that under existing guidance, an individual cannot be covered by a non-HDHP and an HSA at the same time. Health FSAs are generally considered non-HDHPs coverage. The new guidance makes clear that taking advantage of the extensions described above does not change this rule. Accordingly, individuals who retain access to their health FSA balances through 2020 will be considered to be on non-HDHP coverage during this time, and cannot contribute to an HSA on a pre-tax basis until their health FSA balances are exhausted.
To take advantage of the new mid-year election change events, employers should review their plan documents to determine whether a plan amendment is needed. Some Cafeteria Plans will automatically incorporate new permitted IRS election changes, whereas some plan documents will not. If the plan document does not automatically incorporate new permitted IRS changes, then an amendment will be required. In addition, an employer wanting to take advantage of the new extended reimbursement rules for FSAs and DCAPs must adopt a plan amendment. Amendments for the mid-year election events and the extended FSA and DCAP reimbursement periods must be adopted by December 31, 2021, and may be effective retroactively to January 1, 2020, provided that the Cafeteria Plan operates in accordance with the applicable guidance, and the employer informs all employees eligible to participate in the Cafeteria Plan of the changes to the plan.
If you have any questions, please reach out to the MMM Employee Benefits & Executive Compensation Team.