HSA

Legislation Introduced to Expand HSA Access

Senator Rand Paul (R-KY) has introduced the Health Savings Accounts for All Act of 2020 (S.4367). The legislation is intended to expand access and reduce restrictions on health savings accounts (HSAs).

According to details of Senator Paul’s press release, the bill proposes to eliminate the annual limit on tax-deductible contributions to HSAs by individuals and their employers. The requirement to be enrolled in a high deductible health plan in order to contribute to an HSA would also be eliminated. Additionally, HSA balances could be used for the payment of health insurance premiums, direct care service arrangements, and expenses incurred during the prior or current tax year before the establishment of the HSA. Another provision would allow for the tax-free transfer of HSAs upon death to certain family members.


Washington Pulse: The DOL’s New Proposal to Regulate Investment Advice

Few aspects of retirement plan governance have been as controversial as regulating investment advice. Exactly what obligation—if any—does an investment professional have to provide impartial, conflict-free advice to savers and retirees?  When do financial professionals step over the boundary that can make them a fiduciary, with the ethical and legal obligations that come with this duty?

The answers have been inconsistent, stretching over many years. Department of Labor (DOL) fiduciary investment advice regulations date back to the 1970s. Those regulations needed revision in order to better align with today’s investment products and participant-directed retirement plans. Changes were proposed in 2010, withdrawn in response to public comments, revised again in 2015, and made final in 2016.

The DOL delayed implementing the 2016 final investment fiduciary regulations and accompanying guidance. These regulations were ultimately struck down in 2018 as “regulatory overreach” by the United States Court of Appeals for the Fifth Circuit.

The DOL later issued Field Assistance Bulletin (FAB) 2018-02, which states that the DOL will not pursue prohibited transaction claims against fiduciaries who make good-faith efforts to comply with the Impartial Conduct Standards (discussed later). FAB 2018-02 remains in effect.

The DOL has again issued investment advice guidance, this time to replace the guidance struck down by the appellate court. This latest guidance package includes a proposed prohibited transaction class exemption entitled Improving Investment Advice for Workers and Retirees, and a technical amendment to DOL Regulations (Regs.) 2509 and 2510 that implements the appellate court’s order by

  • reinstating the original version of DOL. Reg. 2510.3-21 (including the five-part test);
  • removing prohibited transaction exemptions (PTEs) 2016-01 (the Best Interest Contract Exemption) and 2016-02 (the Class Exemption for Principal Transactions);
  • returning PTEs 75-1, 77-4, 80-83, 83-1, 84-24, and 86-128 to their original form; and
  • reinstating Interpretive Bulletin (IB) 96-1, which is intended to help investment providers, financial institutions, and retirement investors determine the difference between investment education and investment advice. Investment providers and financial institutions may rely on the safe harbors in IB-96-1 in order to avoid providing information that could be construed as investment advice.

The technical amendment became effective on July 7, 2020.

 

What is the five-part test?

The original version of DOL Reg. 2510.3-21 (which the technical amendment reinstates) contains a five-part test that is used to determine fiduciary status for investment advice purposes. Under the test, an investment provider or a financial institution that receives a fee or other compensation is considered a fiduciary if it meets all of the following standards (i.e., prongs) of the test.

  • The provider or institution gives advice on investing in, purchasing, or selling securities, or other property.
  • The provider or institution gives investment advice to the retirement investor on a regular basis.
  • Investment advice is given pursuant to a mutual agreement or understanding with a retirement plan or its fiduciaries.
  • The retirement investor uses the advice as a primary basis for investment decisions.
  • The provider or institution provides individualized advice, taking into account the plan’s demographics, needs, goals, etc.

 

Has the DOL’s opinion changed on rollover recommendations?

In the preamble of the proposed PTE, the DOL clarified that it no longer agrees with the guidance originally provided in Advisory Opinion 2005-23A (better known as the Deseret Letter). In the Deseret Letter, the DOL indicated that a recommendation to distribute and roll over retirement plan assets would not generally constitute investment advice because it would not meet the first prong of the five-part test. But because it is common for the investments, fees, and services to change when the decision to roll over assets is made, the DOL now believes that a recommendation to distribute assets from an IRA or an ERISA-covered plan would be considered investment advice with respect to the first prong of the five-part test.

The DOL acknowledges that advice encouraging an individual to roll over retirement plan assets may be an isolated and independent transaction that would fail to meet the second “regular basis” prong. But determining whether advice to roll over assets meets the “regular basis” prong depends on the facts and circumstances.  So the DOL could view a rollover recommendation that begins an ongoing advisory relationship as meeting the “regular basis” prong.

As discussed above, the proposed PTE would allow investment professionals to receive compensation for advising a retirement investor to take a distribution from a retirement plan or to roll over the assets to an IRA. The investment professional could also receive compensation for providing advice on other similar transactions, such as conducting rollovers between different retirement plans, between different IRAs, or between different types of accounts (e.g., from a commission-based account to a fee-based account).

Under the proposed PTE, financial institutions would need to document why the rollover advice was in the retirement investor’s best interest. Documentation would need to

  • explain whether there were other alternatives available (e.g., to leave the assets in the plan or IRA and select different investment options);
  • describe any applicable fees and expenses;
  • indicate whether the employer paid for some or all of the plan’s administrative expenses; and
  • show the different levels of services and investments available.

In addition, investment providers or financial institutions that recommend rolling over assets from another IRA or changing account types should consider and document the services that would be provided under the new arrangement.

 

Who is covered under the proposed PTE?

The proposed PTE would apply to registered investment advisers, broker-dealers, banks, and insurance companies (financial institutions), and their employees, agents, and representatives (investment professionals) that provide fiduciary investment advice to retirement investors. The proposed PTE would also apply to any affiliates or related entitites.

“Retirement investors” include

  • IRA and plan fiduciaries (regardless of plan size),
  • IRA owners or beneficiaries, and
  • plan participants or beneficiaries with authority to direct their accounts or take distributions.

The proposed PTE defines a “plan” as including 401(a) plans (e.g., 401(k) plans), 403(a) plans, 403(b) plans, defined benefit plans, owner-only plans, simplified employee pension (SEP) plans, and savings incentive match plan for employees of small employers (SIMPLE) plans. The proposed PTE would also apply to employee welfare benefit plans that have established a trust (e.g., VEBAs).

The proposed PTE, defines an “IRA” as an individual retirement account, an individual retirement annuity, a health savings account (HSA), an Archer medical savings account (MSA), and a Coverdell education savings account (ESA).

 

What protection does the proposed PTE offer?

The Internal Revenue Code and ERISA generally prohibit fiduciaries from receiving compensation from third parties and compensation that varies based on investment advice provided to retirement plans and IRAs. Fiduciaries are also prohibited from selling or purchasing their own products to retirement plans and IRAs (known as principal transactions).

Under the proposed PTE, financial institutions and investment professionals providing fiduciary investment advice could receive payments (e.g., commissions, 12b-1 fees, and revenue sharing payments) that would otherwise violate the prohibited transaction rules mentioned above. For example, the exemption would provide relief from prohibited transactions that could occur if a financial institution or investment professional

  • advises a client to take a distribution or roll over assets to an IRA or retirement plan;
  • provides recommendations to acquire, hold, dispose of, or exchange securities or other investments; or
  • recommends using a particular investment manager or investment advice provider.

In addition, the proposed PTE would cover riskless principal transactions  (e.g., when a broker-dealer purchases a security for their own account knowing that it will be sold to a retirement investor at a certain price) as well as principal transactions involving certain specific types of investments (e.g., municipal bonds).

The following transactions would not be covered by the PTE.

  • Transactions where advice is provided solely through a computer model without any personal interaction (i.e., robo-advice arrangements).
  • Transactions in which the investment professional is acting in a fiduciary capacity other than as an investment advice fiduciary under the five-part test, as described below (e.g., a 3(38) investment manager with authority to make discretionary investment decisions).
  • Transactions involving investment providers, financial institutions, and their affiliates if they are the employer of employees covered by the plan; or are a named fiduciary, plan administrator, or affiliate who was chosen to provide advice by a fiduciary who is not independent of the investment professional, financial institution, or their affiliates.

Certain individuals and institutions (and all members within the institution’s controlled group) would be ineligible to rely on the exemption—including those who have been convicted of a crime associated with providing investment advice to a retirement investor, or those who have a history of failing to comply with the exemption. The period of ineligibility would generally be 10 years, but a financial institution with a conviction may petition the DOL for continued reliance on the exemption.

 

What does the proposed PTE require?

To take advantage of the relief provided under the proposed PTE, investment professionals and financial institutions must provide advice in accordance with the Impartial Conduct Standards. The Impartial Conduct Standards contain three components—a reasonable compensation standard, a best interest standard, and a requirement that prohibits investment providers or financial institutions from giving misleading statements about investment transactions or other related matters.  The Impartial Conduct Standards also requires financial professionals and financial institutions to provide the best execution possible when completing security transactions (e.g., completing the transaction timely).

Under the best interest standard, investment professionals and financial institutions are not required to identify the best investment for the retirement investor, but any investment advice given must put the retirement investor’s interests ahead of the interests of the investment professional, financial institution, or their affiliates. This is consistent with the SEC’s Regulation Best Interest.

Investment providers and financial institutions cannot waive or disclaim compliance with any of the proposed PTE’s conditions. Likewise, retirement investors cannot agree to waive any of the conditions. In addition, the proposed PTE would require a financial institution to

  • provide the retirement investor—before the transaction takes place—with an acknowledgment of the institution’s fiduciary status in writing, and a written description of the service to be provided and any material conflicts of interest;
  • adopt and enforce policies and procedures designed to discourage incentives that are not in the retirement investor’s best interests and to ensure compliance with the Impartial Conduct Standards;
  • maintain records that prove compliance with the PTE for six years; and
  • conduct a review at least annually to determine whether the institution complied with the Impartial Conduct Standards and the policies and procedures created to ensure compliance with the exemption. Although an independent party does not need to conduct the review, the financial institution’s chief executive officer (or the most senior executive) must certify the review.

Note that the proposed PTE would not give retirement investors new legal claims (e.g., through contract or warranty provisions) but rather would affect the DOL’s enforcement approach.

 

Next Steps

Many investment advisers, broker-dealers, banks, and insurance companies that will be affected by the proposed PTE currently operate under similar standards found in various state laws and in the SEC’s Regulation Best Interest.  The DOL’s temporary enforcement policy discussed in FAB 2018-02 also remains in effect, as do other more narrowly tailored PTEs.

Each type of investment provider and financial institution is likely affected differently, whether in steps to comply or costs involved. Financial institutions and investment providers may want to review the proposed PTE and start taking steps to comply with it. This may involve creating and maintaining any policies and procedures they don’t already have in place as a result of state law or the Regulation Best Interest.

In the meantime, a 30-day comment period for the proposed PTE starts on July 7, 2020. Comments may be submitted at www.regulations.gov. The Docket ID number is EBSA-2020-0003.

 

 

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IRS Provides Welcome Deadline Relief for Savings Arrangement Reporting, Limited Additional Extensions

On May 28, 2020, the IRS issued limited additional relief that extends deadlines for certain time-sensitive actions related to tax-advantaged savings arrangements. Most awaited was an extension for providing information returns for IRAs, health savings accounts (HSAs), Archer medical savings accounts (MSAs), and Coverdell education savings accounts (ESAs). These information returns are Form 5498, IRA Contribution Information, Form 5498-SA, HSA, Archer MSA, or Medicare Advantage MSA Information, and Form 5498- ESA, Coverdell ESA Contribution Information.

Deadlines for providing these information returns to the IRS and to account owners had previously been extended by IRS Notice 2020-23 through July 15, 2020, in response to the coronavirus (COVID-19) pandemic. The deadline for annual contributions to these accounts was also extended to July 15, 2020. This presented custodial organizations and service providers to these accounts with the dilemma of reporting contributions that could be received as late as the deadline for their reporting.

Notice 2020-35 now provides a six-week window after the July 15, 2020, contribution deadlines in which organizations can prepare and provide these information returns to the IRS and to account owners.

Other Deadlines Not Extended

Notice 2020-23 extended many other deadlines to July 15, 2020, including completing rollovers, making retirement plan loan payments, filing Form 5500, Annual Return, Report of Employee Benefit Plan, as well as numerous others. These deadlines are not extended by the latest guidance in Notice 2020-35.

Extensions Granted by Notice 2020-35

The following are among the limited number of deadlines extended by Notice 2020-35.

  • Providing Form 5498-series information returns for IRAs, ESAs, HSAs, and MSAs. (Providing these information returns after August, 31, 2020, will be subject to IRS penalty, which will be calculated from September 1, 2020, through the date the information returns are actually provided.)
  • Close of the 403(b) plan remedial amendment period remains at June 30, 2020, this guidance making official an earlier IRS website announcement.
  • Adoption by a defined benefit pension plan of a pre-approved plan document, filing a request for a determination letter under the second six-year cycle, or certain other actions with respect to disqualifying provisions have a deadline of July 31, 2020.

Notice 2020-35 also extends to July 15, 2020 (not August 31), several items not previously granted extensions. These include the following.

  • Application for a funding waiver by a defined benefit pension plan that is not a multi-employer (union) plan.
  • Filing IRS Form 5330, Return of Excise Taxes Related to Employee Benefit Plans, and paying these excise taxes.

HSA 2021 Cost-of-Living Adjustments Released

The IRS has issued Revenue Procedure 2020-32, providing inflation-adjusted amounts for health savings accounts (HSAs) for calendar year 2021. Maximum annual HSA contributions will rise from $3,550 to $3,600 for those with self-only insurance coverage, and from $7,100 to $7,200 for those with family coverage.

Minimum deductible amounts for qualifying high deductible health plans will remain (no indexing upward for 2021) at $1,400 for self-only coverage, and $2,800 for a family plan. Maximum annual out-of-pocket amounts under self-only coverage will rise from $6,900 to $7,000, and from $13,800 to $14,000 for family coverage.

 


Washington Pulse: New COVID-19 Relief for Employee Welfare Benefit Plans

During the last few months, the Department of Labor (DOL), Treasury Department, and Department of Health and Human Services (DHHS) have jointly issued multiple pieces of guidance intended to provide much needed relief to those suffering economic hardships from the coronavirus (COVID-19) pandemic. In this article, we’ll explain how the most recent relief affects employee welfare benefit plans.

 

Overview of New Relief

To help overcome the financial hardships facing millions of Americans, the DOL and the Treasury Department published a final rule on May 4, 2020. The final rule extends and suspends various employee welfare benefit plan and COBRA deadlines that fall between March 1, 2020, and the end of a 60-day period following the close of the COVID-19 National Emergency (known as the Outbreak Period), which has yet to be announced.

The DOL and Treasury Department also worked with the DHHS to create EBSA Disaster Relief Notice 2020-01. This guidance extends deadlines for providing notices, disclosures, and documents that are due to plan participants and beneficiaries between March 1, 2020, and the end of the Outbreak Period. The relief applies to plan fiduciaries that act in good faith to provide this information as soon as administratively practicable. The EBSA notice also confirms that Form 5500 filing deadlines that occur between April 1, 2020, and July 14, 2020, must now be filed by July 15, 2020 (calendar-year plans are not affected).

On May 12, 2020, the IRS issued Notice 2020-29 and Notice 2020-33. Notice 2020-29 allows employees to make election changes relating to employer-sponsored group health coverage, health flexible savings accounts (FSAs), and dependent care FSAs mid-year with no special enrollment events. The notice also allows for health FSA and dependent care FSA participants to submit new claims for reimbursement up to December 31, 2020, from amounts that remained in accounts as of a plan year end or the end of the grace period that occurred at any time in 2020.

Notice 2020-33 increases the maximum $500 health 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).

 

How the Final Rule Affects Employee Welfare Benefit Plans

The most significant impact of the final rule involves providing certain individuals extended deadlines for performing certain acts. When calculating the new extended deadlines, the final rule disregards the Outbreak Period.

  • Filing a benefit claim: The final rule extends the deadline for filing claims for benefits under welfare benefit plans. Importantly, this relief will also include calendar-year health FSAs and health reimbursement accounts (HRAs) that had a runout period ending on March 1, 2020 or later. Although this provision will help individuals with existing claims, it does not allow them to incur new claims applicable to an old plan year.
    • Example: An employee terminated employment and lost health coverage on May 1, 2020. Because the plan has a 90 day-runout period for terminated participants, the employee would normally have until July 30, 2020, to submit claims for reimbursement of eligible expenses incurred before the employee terminated employment. The period between the date of termination and the end of the Outbreak Period is now disregarded. If March 2, 2021 is the end of the Outbreak Period, the 90-day runout period will start on March 3, 2021, and end on May 31, 2021.
  • Filing an appeal and requesting a review: The final rule extends the period to file an appeal of an adverse benefit determination. This period must be at least 60 days (for welfare benefit plans) or 180 days (for group health plans) following notification of the adverse benefit determination. The final rule also extends the four-month period for filing a request for external or internal review.
  • Special Enrollment Periods: Employees and their eligible dependents now have more time to enroll in a group health plan following a special enrollment event. Usually individuals must elect coverage during a 30-day period (or a 60-day period, depending on plan provisions) following a special enrollment event.
    • Example: An employee had a child on March 20, 2020. The employee would normally have 30 days to elect coverage for the child. The period between the birth and the end of the Outbreak Period is now disregarded. If October 10, 2020, is the end of the Outbreak Period, the 30-day period would start on October 11, 2020, and end on November 9, 2020.

 

How Notice 2020-29 Affects Employee Welfare Benefit Plans

IRS Notice 2020-29 gives plans additional deadline flexibility and eases restrictions associated with various plan requirements found in the Internal Revenue Code and associated Treasury Regulations. The extensions provided by the Notice are described below.

  • Modified rules on irrevocable elections: Notice 2020-29 eliminates certain restrictions that limit the ability of participants to revoke and make new plan elections after the start of the plan year. During the 2020 plan year, elections pertaining to employer health coverage, health FSAs, and dependent care FSAs can now be made at any time on a prospective basis. This relief is not automatic. An employer will be required to amend its plan to allow participants to take advantage of this relief.
    • Example: A participant elected to defer $1,200 into an FSA during open enrollment for a plan year that began on January 1, 2020. The participant is now permitted to change her election at any time and defer a different amount (e.g., $2,200) if she so chooses.
  • Extended the deadline for incurring claims: Plan participants in health FSAs and dependent care FSAs may now incur and submit new claims for reimbursement up to December 31, 2020, based on amounts that remained in their FSA as of the end of a plan year or the end of a grace period that occurred at any time in 2020. This relief is not automatic. An employer will be required to amend its plan to allow participants to take advantage of this relief.
    • Example:  An employee was a participant in a 2019 calendar year FSA with a grace period that ended on March 15, 2020. He had $1,200 remaining in his account as of that date. He had not incurred any claims that he could submit for reimbursement through March 15, 2020. On June 29, 2020, the participant received medical services in excess of $1,200. He can submit his claim and be reimbursed for that amount.

 

How the Final Rule Affects COBRA Coverage

The Consolidated Omnibus Budget Reconciliation Act (COBRA) helps employees going through a qualifying event (such as termination of employment) maintain health coverage, often at a lower cost than they might find in the marketplace. To assist those who have lost health insurance coverage because of the pandemic, the final rule extends several COBRA-related deadlines. When calculating the new extended deadlines, the final rule disregards the Outbreak Period.

Delayed COBRA Election Deadline

To assist those who have lost health insurance coverage through termination of employment or a reduction of hours, the final rule extends the deadline to elect COBRA coverage. Normally, the election period ends 60 days following the later of 1) the qualifying event or 2) the date the plan provides the COBRA election notice to the qualified beneficiary.

  • Example: An employee is terminated on April 10, 2020, and loses coverage on April 30, 2020. If the terminated employee receives the COBRA election notice on May 5, 2020, he would normally have until July 4, 2020, which is 60 days, to elect COBRA coverage. But the Outbreak Period is now disregarded. If November 14, 2020, is the end of the Outbreak Period, the 60-day election period would start on November 15, 2020, and end on January 13, 2021.

This provision also gives employees flexibility in determining whether to spend money to continue coverage based on the type of medical issues they have during the extended deadline. Some people may choose to not enroll in COBRA coverage unless some type of expensive medical event makes it necessary. Normally, they would have a shorter window to determine the necessity of enrollment.

While the extended deadline helps individuals, it also creates risk for insurers and employers who may see employees taking advantage of the deadlines to enroll only if they incur significant costs. Healthy employees who would normally elect coverage, pay the premiums, and incur limited costs, will not have incentive to enroll during the window and will not be able to help offset costs as they normally would.

Delayed COBRA Payments

The final rule extends the amount of time that a qualified beneficiary has to submit a COBRA premium payment before coverage under the plan will cease. To be considered timely, the payment deadline is normally 30 days after the due date (or 45 days for the initial payment). While it is possible for qualified beneficiaries to take advantage of this relief in order to minimize expenses and avoid paying their premiums during the Outbreak Period, it is important to note that once the Outbreak Period is over, qualified beneficiaries must fully pay all prior months’ premiums in order to retain coverage. This could be a substantial financial burden. But if a qualified beneficiary has a major medical event, it could be cheaper to make up the costs of numerous months of premiums than to pay for the medical expenses.

Delayed COBRA Notices

  • Extended qualified event notification deadline: The final rule extends the date by which a covered employee or qualified beneficiary must notify the plan administrator of the following qualifying events: divorce (or legal separation) or a dependent child ceasing to be a dependent child. The normal deadline is 60 days after the date of the qualifying event.
  • Extended disability notification deadline: Covered employees and qualified beneficiaries have more time to notify the plan administrator of a disability determination. The normal deadline is 60 days after the date of being determined to be disabled.
  • Extended COBRA rights notification deadline: Plan administrators have more time to notify qualified beneficiaries of their COBRA rights following a qualifying event. The normal deadline is 14 days following the qualifying event (or 44 days when the employer is the plan administrator). Although plan administrators are not required to provide the COBRA election notice during the Outbreak Period, they must provide COBRA coverage if a participant elects it. Plan administrators will likely want to provide timely notices to encourage qualified beneficiaries to elect and pay for COBRA coverage.

 

Previous Relief Affecting Employee Welfare Benefit Plans

In March 2020, the IRS released Notice 2020-18, postponing the due date for all Federal income tax returns normally due on April 15, 2020, to July 15, 2020. Although not mentioned, contribution deadlines were expected to be delayed as well. A few weeks later, these expectations were met when Notice 2020-23 officially extended multiple deadlines that fell on or after April 1, 2020, and before July 15, 2020, to July 15, 2020—including deadlines for

  • making 2019 HSA contributions;
  • completing a 60-day rollover;
  • providing Form 5498-SA to HSA owners and to the IRS;
  • forfeiting unused FSA benefits;
  • receiving cash for unused vacation days; and
  • electing benefits in a noncalendar-year cafeteria plan.

 

Watch for Future Guidance

The last few months have seen a flurry of new guidance. This trend may continue for the duration of the pandemic. In fact, at the time of this writing the House of Representatives had just introduced a fourth stimulus package. Ascensus will be closely monitoring all future guidance. Visit ascensus.com for the latest updates.

 

Click here for a printable version of this issue of the Washington Pulse.


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.


IRS Provides Additional Cafeteria Plan Flexibility in Response to Pandemic

The IRS has issued two notices that provide additional flexibility to participants in cafeteria plans as a result of the coronavirus (COVID-19) pandemic. Notice 2020-29

  • permits mid-year election changes on a prospective basis for elections made during calendar year 2020;
  • permits unused amounts in health flexible spending arrangements (FSAs) and dependent care FSAs that remain at the end of a grace period or plan year that ends in 2020 to be used for expenses incurred through December 31, 2020; and
  • provides additional detail and confirmation that individuals enrolled in high deductible health plans (HDHPs) providing COVID-19 testing and telehealth services prior to the satisfaction of a deductible will continue to remain HSA-eligible.

Notice 2020-33 increases the maximum amount permitted for FSA carryover to $550, to be adjusted for inflation, for plan years beginning in 2020.