New IRS Guidance Provides Temporary Flexibility for Cafeteria Plans, FSAs, and Dependent Care Assistance Programs

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On May 12, 2020, the IRS issued new guidance, IRS Notice 2020-29 and IRS Notice 2020-33, which temporarily provides greater flexibility to individuals participating in a cafeteria plan, health flexible spending arrangement (FSA) or dependent care assistance program (DCAP).

As background, cafeteria plan, FSA, and DCAP elections are generally irrevocable for the duration of the plan year unless the plan permits employees to make a new election under limited circumstances, such as if the employee experiences a change in status or there are significant changes in the cost of coverage. While loss of childcare or a change in cost will permit an employee to make a corresponding DCAP change, the rules applicable to cafeteria plans and FSAs are more stringent.

Recognizing that changed circumstances rarely permit mid-year changes with respect to cafeteria plans or FSAs, the IRS guidance temporarily permits mid-year plan changes to increase or decrease medical elections. The guidance also expands the use of unused FSA and DCAP amounts, permits plans to adopt relief on a retroactive basis, and increases the $500 permitted carryover amount for FSAs to $550 based on inflation.

New Temporary Flexibility Not Limited to Those Affected by COVID-19

Significantly, although the IRS adopted this temporary relief in response to the public health emergency posed by the COVID-19 pandemic, the relief is not limited to individuals affected by the pandemic. Instead, the guidance permits employers to make the following changes available to all employees:

  • Employers may amend their cafeteria plans to allow employees to make prospective mid-year election changes during 2020 to health coverage, FSAs, and DCAPs for any reason so long as: (1) the election is prospective in nature, and (2) the amendment does not cause the cafeteria plan to fail the nondiscrimination requirements under Code Section 125.
    • For employer-sponsored health coverage, employers may amend their cafeteria plans to allow employees to (a) make a new election if the employee initially declined to elect employer-sponsored health coverage; (b) revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer; and (c) revoke an existing election, 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.
    • For FSAs and DCAPs, employers may amend the plans to allow employees to revoke an election, make a new election, or decrease or increase an existing election.
  • Employers may amend their cafeteria plans retroactively to January 1, 2020, to take advantage of significant changes to the rules governing the grace period for FSAs and DCAPs and the carryover rule for FSAs.
    • Under the traditional grace period rule, unused amounts in the participant’s FSA or DCAP account can be utilized to pay qualified expenses during the 2½ month period following the end of the plan year. The guidance extends a grace period ending in 2020 (e.g., the period ending March 15, 2020, for a 2019 calendar year plan) to December 31, 2020.
    • Under the carryover rule, if a participant has not used his or her full FSA account at the end of the plan year, the participant may carryover up to $500 to be used in the next year. The guidance increases this carryover amount to $550 based on inflation.
    • Although a plan must generally use either the grace period rule or the carryover rule, not both, the new guidance explains that for 2020, cafeteria plans may use both a grace period and the carryover rule. For example, if an employer provides an FSA that allows a $500 carryover for the 2019 plan year (using a plan year of July 1, 2019, to June 30, 2020), the employer may amend the plan to adopt the $550 carryover beginning with the 2020 plan year and may also amend the plan to adopt the temporary extended period for incurring claims with respect to the 2019 plan year, allowing for claims incurred through December 31, 2020, to be paid with respect to amounts from the 2019 plan year.

HDHP Coverage for Telehealth

In addition, the guidance further confirms that participants with coverage under a high-deductible health plan (HDHP) may receive coverage for telehealth and other remote care services outside the HDHP and before satisfying the HDHP deductible without impacting the participant’s eligibility to contribute to the HSA. The guidance clarifies this relief applies retroactively with respect to services provided on or after January 1, 2020. For example, an otherwise eligible individual with coverage under an HDHP who also received coverage beginning February 15, 2020, for telehealth and other remote care services under an arrangement that is not an HDHP and before satisfying the HDHP deductible will not be disqualified from contributing to an HSA during 2020.

Moving Forward

Employers who wish to make these optional plan changes may do so immediately and on a retroactive basis to January 1, 2020, so long as the employer adopts a formal amendment to the plan by December 31, 2021. While both self-insured and insured plans can take advantage of this flexibility, before changing the elections for insured plans, an employer should receive approval from the plan’s insurance carrier.


The facts, laws, and regulations regarding COVID-19 are developing rapidly. Since the date of publication, there may be new or additional information not referenced in this advisory. Please consult with your legal counsel for guidance.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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