Most employers allow employees covered by the employer-sponsored group health and welfare plans to pay their share of the cost through pre-tax payroll deductions. In order to do this the employer must maintain a written Section 125 plan document. A section 125 plan is the only means by which an employer can offer employees a choice between taxable (i.e., cash) and nontaxable benefits without the choice causing the benefits to become taxable. Such plans are often referred to as a “cafeteria plan,” “premium only plan” (“POP”), or “flexible benefits” plan. The plan can include or be limited to flexible spending account arrangements (FSAs), which allow employees to fund certain health care and dependent care costs with pre-tax dollars.
At the employer’s option, Section 125 plan participants were granted some relief under the Consolidated Appropriations Act, 2021 (CAA) due to the COVID-19 pandemic, including eased rules allowing certain mid-year election changes for FSAs and relaxed requirements related to FSA carryovers and grace periods. IRS Notice 2021-15 extended these optional changes to cover 2021 and clarified that plan document amendments for these changes are due by the end of the calendar year beginning after the end of the plan year in which the amendment is effective and that employers must have operated their plans in accordance with the retroactive amendment’s terms, beginning on its effective date.
If, for example, your 125 plan operating on a calendar year basis (i) implemented FSA carryovers that permitted unused amounts at the end of 2021 to be carried over and used in 2022, and (ii) allowed employees to make a prospective election change in 2021 to modify FSA contributions without a change in status, a 125 plan amendment for these changes must be adopted by December 31, 2022 (assuming the amendment was not already adopted in 2021 along with a similar amendment for changes in 2020). Employers should contact their plan advisors or 125 plan document vendors to confirm amendments will be timely adopted if either of these optional changes were made.
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