On May 12, 2020, the IRS issued guidance temporarily suspending long-standing federal regulations that limit when an employee can make mid-year changes to employer-sponsored health coverage.
Under the normal IRS rules, employees elect health coverage before each plan year during open enrollment, and may not change those elections except in certain limited circumstances, including changes in family status (e.g., marriage, divorce, birth or adoption of child) or job changes that affect plan coverage.
IRS Notice 2020-29 suspends those rules and allows employers to amend their Section 125 plans (known as flexible benefits plans or cafeteria plans) to permit mid-year changes to coverage for the 2020 plan year, regardless of whether the change is permitted under the existing IRS regulations.
Employers may allow any number of changes to employee elections, including:
- Enrolling in the plan if they had previously declined coverage
- Changes between higher- and lower-cost health plan options (e.g., switching from a PPO to an HMO or vice versa)
- Moving from family to individual coverage or vice versa
- Increasing or decreasing health or dependent care flexible spending account (FSA) elections on a prospective basis
Employees may also be allowed to drop health coverage, but only if they attest that they have other comprehensive coverage or will immediately get it through a spouse or the marketplace.
The new guidance also allows health FSA grace periods expiring at any time during 2020 to be extended through December 31, 2020, giving employees more time to spend amounts set aside for medical expenses and procedures delayed by the pandemic. For example, employers with a calendar year plan may extend the 2019 grace period that would have normally expired on March 15, 2020 to December 31, 2020.
There is no one-size-fits-all under the new guidance, and employers have complete discretion to design and implement the allowed changes, or not allow any changes at all.
Amending an employer-sponsored health plan to allow mid-year changes may provide some relief to employees who have experienced wage reductions or furloughs, but rushing to allow coverage changes without considering the financial and administrative pitfalls will only increase a company’s 2020 plan year headache.
To ease the pain, employers should consider, among other things:
- The direct financial cost of allowing employees to drop or add coverage, especially if healthy employees drop plan coverage and employees with high-cost claims remain on the plan
- Any applicable minimum participation requirements, if the plan is fully-insured
- The additional administration in reviewing and processing the election changes
These considerations will help employers make design decisions such as allowing only a limited time period to make changes (e.g., a few days or weeks), allowing health FSA election changes only if the employee has a positive account balance, or limiting changes between coverage options and/or between individual and family coverage.