The IRS Provides More Flexibility for Cafeteria Plans
by Kathy D. Aslinger, Esq. and Law Clerk Becca Hanniford
On May 12, 2020, the Internal Revenue Service released IRS Notices 2020-29 and 2020-33 creating more flexibility in cafeteria plans. Notice 2020-29 addresses concerns raised by employers and employees stemming from COVID-19 and applies only to 2020, while Notice 2020-33 is not specific to COVID-19 or limited to this year. These changes are discussed below.
(1) Mid-Year Election Changes
Typically, when employees elect benefits under a cafeteria plan, those elections are irrevocable for the remainder of the plan year except in certain circumstances, such as a change in employee status. Due to COVID-19 and the current climate of unpredictability, some employers have expressed a willingness to allow employees who initially declined employer-sponsored health coverage an opportunity to elect health coverage, or allow employees to elect to enroll in different health coverage offered by the employer or to drop their existing health coverage. Additionally, employers are recognizing that because of new-found health risks and school and day-care closures, employees may need to increase or decrease amounts of their health flexible spending accounts (“FSAs”) and/or amounts for dependent care assistance.
In response to these concerns, Notice 2020-29 permits an employer to amend its cafeteria plan to allow employees to make mid-year election changes during calendar year 2020 to:
elect employer-sponsored health coverage, if the employee initially declined;
- revoke their existing health coverage and elect to enroll in different health coverage sponsored by the same employer;
- revoke an existing election for employer-sponsored health coverage, so long as employee attests in writing that employee is enrolled or will enroll in health coverage not sponsored by employer;
- revoke an election, make a new election, or decrease or increase an existing election regarding a health FSA; and
- revoke an election, make a new election, or decrease or increase an existing election regarding a dependent care assistance program.
Prior to accepting an employee’s revocation of existing employer-sponsored health-coverage, the employer must receive from the employee a written declaration of the employee’s enrollment or intent to enroll in other health coverage.
An employer who chooses to allow for this flexibility is not required to provide unlimited election changes but may, in its discretion, determine the extent to which to permit and apply the changes. In making these decisions, employers may want to consider the potential for adverse selection. For health FSAs and dependent care assistance programs, employers are permitted to limit mid-year elections to amounts not less than already reimbursed.
This relief may be applied retroactively to periods prior to the issuance of Notice 2020-29 and on or after January 1, 2020, to address a cafeteria plan that permitted mid-year election changes otherwise consistent with the requirements for relief provided in Notice 2020-29.
(2) Unused Amounts Remaining in a Health FSA or Dependent Care Assistance Program
Notice 2020-29 also allows an employer to amend its non-calendar year cafeteria plan to permit employees an extended period of time to apply unused amounts remaining in a health FSA or a dependent care assistance program at the end of a plan year ending in 2020 to pay or reimburse expenses incurred for the same benefit through December 31, 2020. This extension of time for incurring claims is available both to cafeteria plans that have a grace period and plans that provide for a carryover. Further, an employee who is allowed an extension period pursuant to an amended cafeteria plan, and has unused amounts remaining at the end of a plan year or grace period ending in 2020, shall not be permitted to contribute to an HSA during the extension period, except in the case of an HSA-compatible health FSA.
(3) Amending Cafeteria Plans
Employers that wish to amend their cafeteria plans consistent with Notice 2020-29 must adopt a plan amendment. An amendment for the 2020 plan year must be adopted on or before December 31, 2021, and may be effective retroactively to January 1, 2020, so long as the plan operates according to Notice 2020-29. Additionally, employers are responsible for informing all employees eligible to participate of the changes.
(4) High Deductible Health Plans (“HDHPs”)
Notice 2020-29 clarifies several aspects of Notice 2020-15, which permits HDHPs to cover expenses related to testing for and treatment of COVID-19 prior to meeting the minimum deductible. First, Notice 2020-29 clarifies that the relief provided in Notice 2020-15 applies to reimbursements of expenses incurred on or after January 1, 2020. Further, testing and treatment of COVID-19, for purposes of Notice 2020-15, includes the panel of diagnostic testing for influenza A & B, norovirus and other coronaviruses, and respiratory syncytial virus, and any items or services required to be covered with zero cost sharing under the Families First Act, as amended by the CARES Act.
Section 3701 of the CARES Act allows employees to retain eligibility to contribute to an HSA if they also receive coverage for telehealth and remote care services outside an HDHP and allows for HDHPs to retain HDHP status even if coverage of telehealth and remote care services is provided before the minimum deductible is met. The treatment of telehealth and other remote care services under the CARES Act applies with respect to services provided on or after January 1, 2020, with respect to plan years beginning on or before December 31, 2021.
(1) Carryovers for Health FSAs
Historically, cafeteria plans operated on a “use-or-lose” rule, meaning unused benefits or contributions that remained at the end of the plan year were forfeited. A few years ago, the IRS began allowing plans to provide for a $500 carryover of any unused amounts in an employee’s health FSA. Notice 2020-33 increases the maximum permitted carryover amount to 20% of the maximum annual contribution, which is indexed for inflation. Thus, the available carryover from 2020 to a plan year beginning in 2021 increases from $500 to $550.
Employers who wish to permit this expansion of the carryover limit must amend their cafeteria plans on or before the last day of the plan year from which amounts may be carried over, and the amendment may be effective retroactively to the first day of the plan year. Additionally, employers are responsible for informing all employees eligible to participate of the changes.
(2) Individual Coverage HRAs
Notice 2020-33 provides guidance on the payment of individual health insurance coverage premiums from Health Reimbursement Arrangements (“HRAs”). HRAs may only pay or reimburse medical care expenses incurred by an employee during a plan year, and medical care expenses are typically treated as incurred when a covered individual is provided medical care that gives rise to the expense, not when the amount is billed or paid.
Notice 2020-33 permits an HRA to treat an expense for a premium for individual health insurance coverage as incurred on (1) the first day of each month of coverage on a pro rata basis, (2) the first day of the period of coverage, or (3) the date the premium is paid. Thus, an individual coverage HRA with a calendar plan year 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.
Other COVID-19 Coverage:
- Paycheck Protection Program Flexibility Act of 2020
- The Good Faith Necessity Certification Requirement under the CARES Act and Paycheck Protection Program: A Borrower's Update
- How To Get Your Paycheck Protection Program Loan Forgiven: An FAQ Guide for Small Businesses and Self-Employed Individuals
- Are COVID-19 Business Losses Covered By Insurance?
- CARES Act: Small Business Loans
- We've Got Your Six (Reasons for Paid Sick Leave Under the FFCRA) Covered.
- CARES Act Provides Early Access to Retirement Funds and Other Retirement Plan Relief
- DOL Provides Limited Guidance on New Families First Coronavirus Response Act
- A Summary of the Family First Coronavirus Response Act for Employers and Employees
- Wealth Transfer Planning During the COVID-19 Crisis