The IRS has issued Notices 2020-29 and 2020-33 (“Notices”) to give employers with Section 125 cafeteria plans, including health and dependent care spending accounts (FSAs), new flexibility to allow mid-year changes and increased carryover. “Use it or lose it” provisions of health care FSA are loosened in 2020 with a 2019 plan year grace period extension in 2020 and a higher carryover. Changes are at the discretion of the employer. To take advantage of these changes, an employer must adopt plan amendments for the 2020 plan year by December 31, 2021 which reflect the administrative changes actually made since January 1, 2020.
Relaxation of the Section 125 rules is a welcome relief for many employees and employers who want to give employees a second opportunity to elect group health benefits in the new era of COVID-19. Most 125 Plans had open enrollment at the end of 2019, before the disruption of COVID-19. How soon the changes can be implemented will depend on how quickly third party administrators (TPAs) and employers can adapt and communicate. The following is a summary of the changes available.
What can be changed?
If implemented by the employer, an employee may change his or her election under a Section 125 cafeteria plan (125 Plan), on a prospective basis during 2020 only, to:
- Change from one health coverage option to another option under the employer’s 125 Plan
- Enroll in health coverage under the employer’s 125 Plan if the employee had previously declined coverage
- Drop health coverage under the employer’s 125 Plan if the employee certifies that other group health coverage is being elected (a form of certification is included in the Notices)
- For a Health FSA, stop, start or change contributions to the account
- For a Dependent Care FSA, stop, start or change contributions to the account
In effect, employers may provide a new open enrollment period during 2020. These changes do not require any COVID-19 status or reason for the change and are in addition to any changes permitted under the “change in status” rules for 125 Plans.
For Health FSAs with a carryover provision, the maximum carryover from the 2020 plan year can be increased from $500 to $550, and can be subject to future cost-of-living adjustments in step with other benefit limits.
What can be extended?
For Health FSAs and Dependent Care FSAs, the Notices permit the extension of grace periods or carryover periods from the 2019 plan year that ends in 2020 to allow unused funds to be used to reimburse or pay benefits until December 31, 2020, retroactive to January 1, 2020. FSAs may still not have both a grace period and a carryover. Also, if a 125 Plan year ends in 2020, unused funds can be used for benefits until December 31, 2020. The extension applies to both regular and limited purpose Health FSAs. However, if the extension is available for the FSAs, an employee covered by a HDHP will not be eligible to make HSA contributions during the extension period.
Other clarifications to FFCRA and CARES
The Notices clarify that coverage at no cost for COVID-19 testing and treatment will not disqualify an HDHP if covered before deductibles are met or an employee from contributing to an HSA. This exception for HDHP/HSAs applies to reimbursement of COVID-19 expenses retroactive to January 1, 2020. Also, the panel of diagnostic testing for influenza A & B, norovirus and other coronaviruses, and respiratory syncytial virus (RSV) and any items or services required to be covered with zero cost sharing are part of COVID-19 testing and diagnostics.
In addition, while the CARES Act permits coverage of telemedicine and other remote services before deductibles are met by a HDHP without disqualifying the HDHP, the Notices extend that permission from January 1, 2020 rather than the March 27, 2020 date of CARES Act enactment. Thus, an individual receiving telemedicine services from January 1 through March 27 is still an eligible individual for HDHP/HSA purposes.
Employer discretion to make changes is flexible
The Notices provide employers with the ability to determine the extent of new elections, as long as the Section 125 nondiscrimination rules are satisfied. Employers can choose some but not all 125 Plan elections outllined above and can provide for a one-time election or more than one election. The Notices recognize that employers may want to tailor the elections to consider possible adverse selection by employees so that the election may be limited to circumstances in which an employee’s benefits will be improved or increased as a result of the election. With Health FSAs and Dependent Care FSAs, the Notices also recognizes that the elections may be limited to no less than amounts already reimbursed (so that the FSA would not have already reimbursed more than the new election amount).
Plan amendments are required
The Notices make clear that 125 Plans are written plans and must formally adopt written amendments to reflect any changes permitted under the Notices. The 2020 changes may be incorporated in amendments adopted as late as the end of 2021.
This is a good time for employers to review their 125 Plan documents and to record in writing the design decisions made in compliance with the Notices, even if formal amendments are postponed. Employers using prototype plan documents should check with the document provider to understand any limitations on amendments for these changes.
Recommended Actions
Employers with 125 Plans that allow pre-tax salary reductions by employees should consult with their TPAs and counsel to consider what changes are desired and what changes can be implemented and when.
When employers have made design decisions for a 125 Plan, employers should consider appropriate employee communications to explain any changes in elections and/or plan terms. If any employee communication has not already addressed the COBRA delays discussed in our recent Comp and Benefits Brief those changes could also be addressed in a new employee communication.
