On May 12, 2020, the Internal Revenue Service (IRS) issued two notices permitting employers to offer new opportunities for employees to change their salary reduction elections under a cafeteria plan and avoid forfeitures of unused amounts in health flexible spending arrangements (health FSAs) and dependent care assistance programs (DCAPs). These changes, which are primarily in response to the COVID-19 outbreak, provide useful new tools for employers to help ease the economic impact experienced by their employees as a result of the outbreak.

Notice 2020-29 – New Cafeteria Plan Election Changes

Notice 2020-29 sets forth new mid-year election changes that are permitted for health coverage under a cafeteria plan, health FSAs, and DCAPs in 2020. The following Q&As address some of the highlights of these changes.

What New Election Changes Are Permitted?

With respect to employer-sponsored health coverage, an eligible employee may:

• make a new election on a prospective basis, if the employee initially declined to elect such coverage;
• revoke an existing election for such 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); and
• revoke an existing election for such coverage on a prospective basis (subject to the attestation requirement discussed below).

With respect to a health FSA and a DCAP, an eligible employee may revoke an election, make a new election, or decrease or increase an existing election on a prospective basis.

Can the Election Changes Be Permitted for Any Reason?

Yes, with the exception of when an employee requests to revoke an election to enroll in other health coverage not sponsored by the employer. In that situation, 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 provided a sample of an acceptable written attestation for this purpose in Notice 2020-29.

When Can the Election Changes Be Made?

These new election changes are only permitted to be made during the 2020 calendar year. However, an employer may further limit the timeframe during which the election changes could be made, including to an open enrollment-like window.

Do the Election Changes Have to Be Permitted?

No, they are optional. Additionally, an employer may choose the extent to which the election changes are permitted and applied, provided that the changes are applied only prospectively and not in a manner that would violate the nondiscrimination rules applicable to cafeteria plans. Specifically, an employer may wish to limit changes to increases in health coverage to minimize adverse selection and to limit decreases to existing elections for health FSAs to minimize overspending of the accounts.

Practice Pointer: Employers should carefully consider the financial impact of permitting these election changes, particularly the changes for health coverage, and should closely consult with their health plan’s insurer or stop-loss carrier.

Is an Amendment Necessary to Permit the Election Changes?

Yes. A cafeteria plan that permits the new election changes must be amended. The amendment may be adopted as late as December 31, 2021, and may be effective retroactively to January 1, 2020, provided that employees are notified of the changes.

Notice 2020-29 – Extended Claims Period for Health FSAs and DCAPs

Notice 2020-29 also allows employers to permit employees to apply unused amounts remaining in a health FSA or a DCAP as of the end of a grace period or plan year ending in 2020 to pay or reimburse expenses incurred through December 31, 2020. For example, a cafeteria plan with a health FSA that has a calendar year plan year and a grace period ending on March 15 immediately following the end of each plan year may permit employees to apply unused amounts remaining in an employee’s health FSA as of March 15, 2020, to reimburse the employee for medical care expenses incurred through December 31, 2020.

As with the new election changes, a cafeteria plan is not required to permit the extended claims period. However, if the extension is implemented, the cafeteria plan must be amended. The amendment may be adopted as late as December 31, 2021, and may be effective retroactively to January 1, 2020, provided that employees are notified of the changes.

Practice Pointer: An extension of the claims period for a general purpose health FSA would be an extension of coverage that is not compatible with a health savings account. As a result, employers offering a high deductible health plan compatible with a health savings account should carefully consider any extension to avoid inadvertently disqualifying employees from participating in a health savings account.  

Notice 2020-29 also clarifies certain COVID-19 related issues for health savings account-eligible, high-deductible health plans.

Notice 2020-33 – FSA Carryover Limit Increased

In response to an earlier executive order from President Trump, the IRS announced in Notice 2020‑33 an increase to the limit for carryovers of unused funds in a health FSA remaining at the end of a plan year. The increase is unrelated to the COVID-19 outbreak and applies on an ongoing basis. The limit, which is currently at $500, is being increased to 20% of the annual health FSA contribution limit, which is at $2,750 for 2020. Thus, the carryover limit for unused funds in a health FSA at the end of the 2020 plan year is $550 (20% of $2,750). The carryover limit will continue to increase over time as the health FSA contribution limit increases.

As with a carryover provision in general, a cafeteria plan does not have to permit the increased carryover limit. However, if the increase is permitted, the cafeteria plan will have to be amended. For the 2020 plan year, through a special rule that correlates to the timing of an amendment for the changes in Notice 2020-29, the amendment may be adopted as late as December 31, 2021, and applied retroactively to January 1, 2020, provided that participants are informed of the change.  For later plan years, the amendment must be adopted by the end of the plan year to which the carryover is to apply.

Notice 2020-33 also provides certain clarification for individual coverage health reimbursement arrangements.