IRS Guidance on COVID-19 Related Relief for Cafeteria Plans and Flex Spending Arrangements
Shayna Byrne, J.D.
5.26.20 | Client Alert – COVID-19 Update
On May 12, 2020, the IRS released Notices 2020-29 and 2020-33, which provides for increased flexibility with respect to 2020 cafeteria plans1, including employer-sponsored:
- Health coverage;
- Health Flexible Spending Arrangements (FSAs);
- Dependent care assistance programs; and
- Individual coverage Health Reimbursement Arrangements (HRAs).
The relief includes:
- Relaxed mid-year election changes (applicable to health coverage, FSAs, and dependent care assistance programs);
- Expanded claim periods for health FSAs and dependent care assistance programs;
- Increased amount of the carryover limits of unused amounts remaining in a health FSA (adjusted for inflation); and
- Clarification on timing for reimbursements by health plans.
Mid-Year Elections Under a Cafeteria Plan
An employer may amend its calendar year 2020 employer-sponsored health coverage, health FSA, or dependent care assistance program to allow each eligible employee to make a prospective election change during calendar year 2020. The elections regarding these benefits are generally irrevocable and must be made prior to the first day of the plan year. However, under the new guidance, if the employer amends its cafeteria plans to provide for a mid-year change, the employee does not need to meet the criteria that would normally permit a mid-year election change (such as, marriage, change in number of dependents, employment changes).
Plan election changes can allow an employee to:
- Enroll in a group health plan even if the employee initially declined health coverage;
- Revoke an existing election and enroll in a different health coverage plan option (including changing coverage from self-only to family);
- Revoke an existing election provided that the employee attests in writing that (s)he is enrolled or immediately will enroll in other health coverage not sponsored by the employer;
- Revoke an election, make a new election, or decrease or increase an existing election (for FSA and/or dependent care assistance program).
To effectuate these changes, the cafeteria plan will need to be amended by December 31, 2021. This relief may be applied retroactively to periods prior to the issuance of the new Notice (May 12, 2020) and after Jan. 1, 2020. An employer, however, is not obligated to provide any of the mid-year election changes and may limit elections to specific circumstances.
Extended Claims Period for Health FSAs and Dependent Care Assistance Programs
An employer may amend its health FSA or dependent care assistance program to permit employees to apply the unused carryover (currently $550) amounts remaining in its plan, as of the end of a grace period ending in 2020 or a plan year ending in 2020, to pay or reimburse expenses incurred through December 31, 2020. Under the general grace period rule, a cafeteria plan could permit a participant to apply unused amounts (including amounts remaining in a health FSA or dependent care assistance program) at the end of the plan year to pay expenses incurred for those same qualified benefits during the period of up to two months and 15 days immediately following the end of the plan year.
This relief applies to all health FSAs, including limited purpose health FSAs compatible with HSAs. However, health FSA amounts may only still be used for medical care expenses and dependent care assistance program amounts may only be used for dependent care expenses.
The deadline to adopt a plan amendment to allow for an extended grace period is December 31, 2021.
Increased FSA Carryover Amounts
The IRS previously permitted carryovers of unused contributions up to $500 under Notice 2013-71. The new Notice 2020-33 increases the allowable carryover amount to up to $550 (20% of $2,750, the indexed 2020 limit pursuant to Sec. 125(i)).
FSAs have until December 31, 2021 to reflect this change in the carryover amount.
Timing of Premium Reimbursements by Health Plans
The general rule provides that a health plan may only reimburse medical care expenses, including premium reimbursements, that were incurred after the beginning of the plan year. Accordingly, a health plan could not reimburse medical care expenses incurred before the beginning of the plan year. Notice 2020-33 modifies the general rule to allow a plan to treat an expense for a premium for health insurance coverage as incurred on:
- The first day of each month of coverage on a pro rata basis;
- The first day of the period of coverage; or
- The date the premium is paid.
Therefore, an individual coverage HRA with a calendar year plan, may immediately reimburse a substantiated premium for health insurance coverage that begins on January 1 of that plan year, even if the covered individual paid the premium for the coverage prior to the first day of the plan year.
For more information about cafeteria plan changes and the updated IRS guidance, please contact your plan or benefits administrator.
For more information on any other matter related to the COVID-19 pandemic, please contact your Berdon advisor and visit Berdon’s COVID-19 Information Center.
Berdon LLP New York Accountants
1Section 125 of the Internal Revenue Code defines a cafeteria plan as a written plan maintained by an employer under which all participants are employees, and where all participants may choose among two or more benefits consisting of cash and qualified benefits. Subject to certain exceptions, Sec. 125(f) defines a qualified benefit as any benefit, which with the application of section 125(a), is not includable in the gross income of the employee. Qualified benefits that may be provided under a cafeteria plan include employer-provided accident and health plans excludable under Sec. 106 and 105(b), health FSAs excludable under sections 106 and 105(b), and dependent care assistance programs excludable under Sec. 129.