I. Background

On May 12, the IRS issued Notice 2020-29 “COVID-19 Guidance Under Section 125 Cafeteria Plans and Related to High Deductible Health Plans” and Notice 2020-33 “Section 125 Cafeteria Plans – Modification of Permissive Carryover Rule for Health Flexible Spending Arrangements and Clarification Regarding Reimbursements of Premiums by Individual Coverage Health Reimbursement Arrangements.” As explained in more detail below, Notice 2020-29 provides increased flexibility for cafeteria plans in response to the COVID-19 pandemic and Notice 2020-33 increases the health flexible spending arrangement (“Health FSA”) carryover limit and clarifies the ability of a health plan to reimburse individual insurance policy premium expenses incurred prior to the beginning of the plan year.

II. What Do the Notices Allow Employers to Do?

A. Notice 2020-29 allows employers to amend their cafeteria plans to provide additional mid-year elections during calendar year 2020 related to employer-sponsored health coverage, Health FSAs, and dependent care assistance program (“DCAPs”). If an employer wants to provide for any of the mid-year election changes described below, it must adopt a plan amendment on or before December 31, 2021, but inform all employees eligible to participate in the cafeteria plan of the changes without delay.

• Health Coverage (Self-Funded or Insured): An employer may amend its cafeteria plan for the 2020 plan year to allow employees to: (1) make a new election on a prospective basis, if the employee initially declined to elect health coverage sponsored by the employer; (2) revoke an existing election and make a new election to enroll in different health coverage sponsored by the employer on a prospective basis; and (3) revoke an existing election 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. Notice 2020-29 provides an example of an acceptable written attestation.
• Health FSAs: An employer may amend its cafeteria plan for the 2020 plan year to allow employees to: (1) revoke a Health FSA election on prospective basis; (2) make a new Health FSA election on a prospective basis; or (3) decrease or increase an existing Health FSA election on a prospective basis.
• DCAPs: An employer may amend its DCAP for the 2020 plan year to allow employees to: (1) revoke a DCAP election on a prospective basis; (2) make a new DCAP election on a prospective basis, or (3) decrease or increase an existing DCAP election on a prospective basis.

B. Notice 2020-29 allows employers to amend their cafeteria plans to extend the claims period for a Health FSA and/or DCAP that has a grace period ending in 2020, or a plan year ending in 2020, through December 31, 2020. If an employer wants to provide for an extended grace period described below, it must adopt a plan amendment on or before December 31, 2021, but inform all employees eligible to participate in the cafeteria plan of the changes without delay.

• Health FSAs: An employer may amend its Health FSA grace period to allow employees to apply unused amounts remaining in the Health FSA as of the end of the 2020 plan year or 2020 grace period to pay or reimburse medical care expenses incurred through December 31, 2020. However, if an employer chooses to make such an amendment, an individual who had unused amounts remaining at the end of the grace period and is allowed an extended period to incur expenses under the Health FSA, will not be eligible to contribute to an HSA during the extended period (unless the Health FSA is a limited purpose Health FSA).
  
  Similarly, if a Health FSA has a carryover (instead of a grace period), an employer may amend its cafeteria plan to temporarily extend the period for incurring claims with respect to the 2019 plan year. Practically, this is only an issue for non-calendar year plans because calendar year plans automatically have until December 31, 2020 to spend down 2019 carryover amounts.
• DCAPs: An employer may amend its DCAP to allow employees to apply unused amounts remaining in the DCAP as of the end of the 2020 plan year or 2020 grace period to pay or reimburse dependent care expenses incurred through December 31, 2020.

C. Notice 2020-29 clarifies certain high deductible health plan (“HDHP”) and telehealth issues under Notice 2020-15, the Families First Coronavirus Response Act (“FFCRA”), and the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”).

• Notice 2020-15 provides that an HDHP will not fail to be an HDHP merely because, the health plan provides medical care services and items purchased related to testing for and treatment of COVID-19 prior to the satisfaction of the applicable minimum deductible. Notice 2020-29 clarifies that such services may be provided on or after January 1, 2020. For purposes of this rule, testing and treatment for COVID-19 includes the panel of diagnostic testing for influenza A and B, norovirus and other coronaviruses, and respiratory syncytial virus (RSV) and any items or services required to be covered with zero cost sharing under FFCRA Section 6001, as amended by the CARES Act.
• The CARES Act Section 3701 amended Code Section 223(c) to provide that an individual with HDHP coverage may also receive coverage for telehealth and other remote care services before satisfying the HDHP deductible and still contribute to an HSA. Notice 2020-29 clarifies that this provision of the CARES Act applies with respect to services provided on or after January 1, 2020 with respect to plan years beginning on or before December 31, 2021.

D. Notice 2020-33 increased the Health FSA carryover limit for a plan year starting in 2020 to $550 (from $500). If an employer wants to increase its Health FSA carryover limit for plan year 2020, it must adopt a plan amendment on or before December 31, 2021, but inform all employees eligible to participate in the cafeteria plan of the changes without delay.

E. Notice 2020-33 provides a limited exception to the rule that a health plan (including a premium reimbursement plan in a cafeteria plan or an individual coverage health reimbursement arrangement) may not reimburse medical care expenses incurred before the beginning of the plan year and qualify for an exclusion from income and wages under Code Sections 105 and 106. Specifically, such a plan is permitted to treat an expense for a premium for health insurance coverage as incurred on: (1) the first day of each month of coverage on a pro rata basis; (2) the first day of the period of coverage; or (3) the date the premium is paid.

III. Conclusion

While IRS guidance that provides additional flexibility for cafeteria plans is generally a good thing, employers may want to hold-off amending their plans until they evaluate the potential effects of such amendments. Considerations may include:

• Amendments related to mid-year election changes, extended claims periods, and increased carryover limits are voluntary. Employers may allow some, but not all, changes.
• If an employer chooses to amend its cafeteria plan to provide more flexible mid-year election changes, it is not required to provide unlimited changes and may not want to due to the potential for adverse selection of health coverage by employees.
• If an employer chooses to amend its cafeteria plan to provide more flexible mid-year election changes for Health FSAs and/or DCAPs, it may limit mid-year election changes to amounts no less than amounts already reimbursed.
• If an employer chooses to amend its cafeteria plan to provide more flexible election changes, there could be administrative challenges, particularly if the employer does not limit when and how many mid-year election changes employees may make.