The Internal Revenue Service recently issued Notices 2020-29 and 2020-33, which relax some of the rules applicable to cafeteria plans in light of the COVID-19 pandemic. Notice 2020-29 will apply to the vast majority of cafeteria plan sponsors and also applies to dependent care flexible spending accounts and premium payment elections, while Notice 2020-33 is more limited and only applies to health FSAs.
Open Enrollment All Over Again?
We have all known since we were wee little children that cafeteria plan elections are irrevocable during the plan year, except in certain limited circumstances. These strict rules about election changes would normally mean that a participant could not change their benefit plan premium payment election or flexible spending account elections without having a change in status. Notice 2020-29 allows cafeteria plans to be amended to permit employees who are eligible to make salary reduction contributions under the plan to:
1. With respect to employer-sponsored health coverage,
Make a new election on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage;
Revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis; and
Revoke an existing election on a prospective basis, provided the employee attests in writing they are enrolled, or immediately will enroll, in other health coverage not sponsored by the employer;
2. Revoke an election, make a new election, or decrease or increase an existing election applicable to a health FSA (including a limited purposes FSA) on a prospective basis; and
3. Revoke an election, make a new election, or decrease or increase an existing election regarding a dependent care assistance program on a prospective basis.
There are no “change in status” requirements for these new election changes, other than the requirement that in order to revoke an existing election for employer-sponsored health coverage, the employer must receive from the employee an attestation that the employee is enrolled or will immediately enroll in other health coverage. A cafeteria plan sponsor does not have to allow all of the newly-permitted election changes. The plan sponsor can also impose limits on the number of changes, and when they can be made. Employers can also take into account the potential for adverse selection and restrict election changes for that reason. In addition, employers are allowed to limit mid-year elections to amounts no less than the amounts already reimbursed for health FSAs and dependent care FSAs, preventing an employee from taking advantage of the uniform availability requirement and reducing his health FSA election to zero after being fully reimbursed to the extent of an earlier election.
Extended Period to Use Unused Health FSA and Dependent Care FSA
Due to the nature of the pandemic, the IRS acknowledges that unanticipated changes in the availability of medical care (like canceled elective procedures) and dependent care (day care closures) could result in unused flexible spending account balances. Notice 2020-29 allows cafeteria plans to provide an extended period to apply unused amounts remaining in a health FSA or dependent care assistance FSA to pay or reimburse medical care or dependent care expenses. This extended period would apply to unused amounts at the end of any grace period that ends in 2020 or plan year ending in 2020. The extended period ends December 31, 2020. As an example, a cafeteria plan participant with unused health FSA funds at the end of the grace period for the 2019 calendar year (i.e. as of March 15, 2020) can now use those funds for medical expenses incurred through December 31, 2020. Participants should take care with respect to this extended grace period, because the availability of these funds will constitute a health plan that is not a high deductible health plan if the health FSA is not a limited purposes HSA.
Increased Health FSA Carryover Limit
In Notice 2020-33, the IRS has increased the carryover limit of unused health FSA amounts remaining as of the end of a plan year that can be used in the following plan year. That limit was previously $500, and now beginning with the 2020 plan year (for carryover to 2021) the new limit is $550. It’s important to note that the ability to carryover is permissive, a cafeteria plan does not have to permit carryovers. The IRS noted that the maximum allowed salary reduction amount for health FSAs is indexed for inflation ($2,750 for 2020) while the carryover amount was not, and consistent with the June 2019 Executive Order “Improving Price and Quality Transparency in American Healthcare to Put Patients First,” the carryover limit was required to be adjusted. Therefore, going forward, the carryover limit will be equal to 20% of the maximum salary reduction contribution for health FSAs for the plan year. Adjustments will only be made in multiples of $10.
Extended Period for Employee Elections for 2020 Plan Year
Notice 2020-33 allows individuals to increase their health FSA contributions, or make health FSA contributions, as a result of the increase in the carryover amount. This election change is available regardless of whether the individual is affected by the pandemic. Although only future salary may be reduced under the revised election, amounts contributed to the health FSA after the revised election may be used for any medical care expense incurring during the first plan year that begins on or after January 1, 2020.
Notice 2020-33 Changes Not Applicable if Health FSA Does Not Allow Carryovers
You will note that both of these health FSA changes found in Notice 2020-33 are limited to cafeteria plans which allow for health FSA carryovers from one year to the next. Since not all cafeteria plans allow such carryovers (sometimes because such plans cannot allow the grace period in the following year to incur and submit claims for the previous year), this new IRS guidance will not impact all cafeteria plans.
Plan Amendments Are Required
Plan amendments to reflect all of the changes permitted in Notice 2020-29 and Notice 2020-33 will not be required until the last day of the 2021 plan year, and may be retroactive to January 1, 2020, provided the plan is operated in accordance with the changes and all employees are notified of the changes.
Employers can begin operating in accordance with these new rules immediately. Since the changes are almost all beneficial to employees, an employer that desires to offer this new flexible benefit plan flexibility is advised to get the word out on these new features.