More Details on IRS Guidance for Cafeteria Plan Flexibility

On Tuesday, the IRS issued two Notices (2020-29 and 2020-33) that provide additional flexibility to participants in cafeteria plans as a result of the coronavirus (COVID-19) pandemic. The following provides additional details on the contents of these Notices.

Permitted Election Changes

Cafeteria plan elections must be made prospectively in advance of the plan year and can only be changed in limited circumstances due to certain events, as detailed in Treasury Regulation (Treas. Reg.) 1.125-4. The IRS has recognized that the permitted election changes in Treas. Reg. 1.125-4 are not extensive enough to accommodate plan participants’ needs, given the unprecedented circumstances of the COVID-19 pandemic. IRS Notice 2020-29 permits additional, temporary flexibility to make prospective, mid-year election changes during the 2020 calendar year for health coverage, health flexible spending arrangements (FSAs), and dependent care assistance plans (DCAPs).

An employer will be permitted (but is not required) to amend its plan to allow for prospective election changes that would not have to satisfy the requirements of Treas. Reg. 1.125-4. The following election changes will be permitted.

  • 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 (note that the employer can rely on the employees’ attestation that they are enrolled or will enroll in other coverage, unless the employer has actual knowledge to the contrary; a sample attestation of other coverage is included in Notice 2020-29 for use in satisfying this requirement)
  • Revoke an election, make a new election, or decrease or increase an existing election regarding a health FSA on a prospective basis
  • Revoke an election, make a new election, or decrease or increase an existing election regarding a DCAP on a prospective basis

Employers can use discretion in amending for election changes and not be required to provide for all changes on an unlimited basis. But they will still need to comply with Internal Revenue Code nondiscrimination rules. Also, as long as they comply with existing rules, employers can design the plan election changes to prevent adverse selection.

Employers will have to provide all applicable notices to participants if they change the terms of the plan; this would include distributing a summary of material modifications (SMM) for ERISA plans.

If amounts have already been reimbursed from an FSA, employers can limit a participant’s ability to change an election amount so that the new election cannot be an amount below what has already been reimbursed.

This guidance can be applied retroactively to January 1, 2020, to plans that have already permitted election changes outside the scope of Treas. Reg. 1.125-4 and have been operating in accordance with the requirements of Notice 2020-29.

These permitted election changes are not mandatory, they are options. Employers that want to offer them must amend their plans to allow for the relief as permitted by Notice 2020-29. The amendment (which will apply only for the 2020 plan year) must be adopted on or before December 31, 2021, and may be effective retroactively to January 1, 2020. In the interim, a plan that permits these changes should operate in accordance with Notice 2020-29 and the employer must inform all eligible employees of the changes to the plan. Notice 2020-29 does not provide details on the required timing to notify participants; presumably participants should be informed as soon as practicable.

Extended Claims Period for Health FSAs and DCAPs

Because of unanticipated requirements to stay at home and associated business closures that came about early in the year, employees may have had difficulty using their FSA funds. For example, they may have been unable to see a doctor or no longer needed to use daycare. As a result, they are more likely now than under normal circumstances to have unused amounts remaining in their FSAs or DCAPs when their plan year or grace period ended.

Notice 2020-29 permits employees to submit new claims for reimbursement of the amounts that remained in their health FSAs or DCAPs as of the end of a plan year, or end of the grace period, as long as the end date was any time in 2020 (this will affect 2019 calendar year plans that had a grace period with an end date any time in 2020 but not 2019 calendar year plans with no grace period). Employees will be able to be reimbursed for expenses that are incurred through December 31, 2020, with the funds remaining in the account that would otherwise have been forfeited. Regardless, the dollars that are in health FSAs and DCAPs must still be used for the same purposes and cannot be applied to other expense types as a result of this guidance.

The extension of time for incurring claims is available to cafeteria plans that have a grace period and plans that provide for a carryover, as long as the end of the plan year or end of the grace period was in 2020.

For general-purpose health FSAs, this additional extension will cause individuals to be health savings account (HSA)-ineligible for the extent of the extended claim period. This is something that employees may not have anticipated, and will affect those who may have started to make HSA contributions, believing that their FSA was no longer covering them.

These extensions are not mandatory, they are options. Employers who want to offer them must amend their plans to allow for the extensions as permitted by Notice 2020-29. An amendment for the 2020 plan year (that will apply only for the 2020 plan year) must be adopted on or before December 31, 2021, and may be effective retroactively to January 1, 2020. In the interim, the plan should operate in accordance with Notice 2020-29, and the employer must inform all eligible employees of the changes to the plan.

HSA/HDHP Impact

The IRS has provided guidance in previous Notices that COVID-19 testing and treatment costs can be provided before satisfying a health plan deductible and not affect an individual’s eligibility to make HSA contributions. Notice 2020-29 clarified that the previously-released guidance applies to all costs for testing and treatment incurred on or after January 1, 2020. It also specified that the panel of diagnostic testing for influenza A and B, norovirus and other coronaviruses, respiratory syncytial virus (RSV), and any items or services required to be covered with zero cost sharing will be considered expenses for testing and treatment and will not affect HSA eligibility.

Telemedicine arrangements are generally viewed by the IRS as plans that provide coverage before a minimum annual deductible is met, and generally disqualify an individual from making HSA contributions. But recent legislation temporarily allows HSA-compatible high deductible health plans (HDHPs) to cover telehealth and other remote care services before satisfying a deductible. Notice 2020-29 confirms that HSA-eligible individuals who have received telehealth or other remote care services on or after February 15, 2020, that might otherwise have disqualified them, will be HSA-eligible for 2020.

Increased FSA Carryover Limit

IRS Notice 2020-33 increases the maximum $500 FSA carryover amount to an amount that is equal to 20 percent of the maximum salary reduction contribution for the plan year. The increase takes effect immediately, making the maximum amount that can be carried forward for the 2020 plan year $550 (20 percent of $2,750).

A plan that wants to adopt the provision will have to be amended. For the 2020 plan year, the amendment must be adopted on or before December 31, 2021, and may be effective retroactively to January 1, 2020, provided that the employer informs all individuals eligible to participate in the plan of the changes. In future years, amendments would have to be adopted at any time on or before the last day of the plan year.

ICHRA Relief

Notice 2020-33 also provides relief for the new individual coverage health reimbursement arrangements (ICHRAs). Plans that run on a calendar plan year may reimburse a substantiated premium for health insurance coverage that begins on January 1 of that plan year, even if the covered individual paid the premium for the coverage before the first day of the plan year. This relief is designed to ease administrative issues, given that premiums for insurance coverage would generally be due before the effective date of the coverage.