IRS provides COVID-19 flexibility for section 125 cafeteria plans and high deductible health plans

On May 12, 2020, the IRS released Notices 2020-29 and 2020-33 which are intended to help taxpayers address unanticipated health and dependent care expenses due to the COVID-19 pandemic. Under this collective guidance, employers have the option to amend their section 125 cafeteria plans and flexible spending accounts (FSAs) to allow employees to make prospective midyear election changes, regardless of the reason, during calendar year 2020.

Background

The general rule is employee elections for pretax payment of employer-sponsored health coverage, health FSAs and dependent care assistance programs must be made prior to the first day of the plan year. They also must be irrevocable for the plan year unless the employee experiences a permitted change in status or there are significant changes in the cost of coverage. This requirement includes an affirmative election to participate or a default election not to participate.

Key takeaways

• Employers can modify plans to allow employees to make prospective midyear elections for health coverage, health FSAs and dependent care assistance programs.
• Claim periods for taxpayers to apply unused amounts remaining in a health FSA or dependent care assistance program for expenses incurred for those same qualified benefits are extended through Dec. 31, 2020.
• The permitted carryover amount for health FSAs is increased to $550 from $500.
• Previously provided temporary relief for high deductible health plans (HDHPs) may be applied retroactively to Jan. 1, 2020.
• An employer electing to provide this midyear election flexibility, or allow additional time to apply unused amounts in a health FSA to pay or reimburse expenses for the remainder of the 2020 year, must adopt a plan amendment documenting the change to its plan. Any amendment for the 2020 plan year can be adopted as late as Dec. 31, 2021.

Employee election revisions under section 125 cafeteria plan allowed

An employer may amend its section 125 cafeteria plan to allow employees to:

1. Make a new election for employer-sponsored health coverage on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage;