Keenan Briefings


COVID-19: IRS Issues Relief for Cafeteria Plans

May 19, 2020

On May 12, 2020, the Internal Revenue Service (IRS) issued relief for § 125 cafeteria plans due to the COVID-19 pandemic and the impact it may be having on employees participating in these plans. For calendar year 2020, employers are being offered greater flexibility in administering certain mid-year election change requests. They may also extend claim periods for employees to use amounts remaining in their health flexible spending arrangements (FSAs) and dependent care assistance programs (DCAPs). In addition, the IRS has increased the 2020 FSA carryover limit from $500 to $550. This guidance can be found in Notices 2020-29 and 2020-33 respectively. This relief is optional unlike the benefit timeline extensions recently mandated by the Departments of Labor and Treasury in their April 28, 2020 joint final rule.

Flexibility in Allowing Mid-Year Election Change Requests

Under existing § 125 regulations, employees are prohibited from making mid-year changes to their annual benefit elections except in cases of certain life status or other specific events as prescribed by the IRS. For calendar year 2020, employers can amend their plans to allow employees to make some or all of the following changes mid-year without satisfying standard criteria, provided they are offered on a nondiscriminatory basis and applied prospectively:

  • Enroll in health coverage if the employee initially declined.
  • Switch plans or tiers of health coverage including a change from self-only to family coverage.
  • Drop coverage to switch to other health coverage including individual coverage, but only if the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage. (The IRS provides sample attestation language for this purpose.)
  • Enroll, cancel, increase or decrease health FSA or DCAP elections. To eliminate the risk of overspent accounts, employers may limit mid-year election decreases to amounts no less than amounts already reimbursed, which is an important consideration in situations where employees have spent down more than they have contributed to date. Importantly, this relief does not permit employers to refund contributions already made but not yet spent. Employers should be prepared for this question.

We expect most employers will be interested in allowing the gamut of election changes under their FSAs and DCAPs but will narrow the scope of what they will allow under their health plans due to the potential for adverse selection. Any liberalization to existing mid-year election rules that an employer wants to adopt under its health plan will need to be approved by their insurer or stop loss carrier.

Extending Claim Periods for FSAs and DCAPs

Employers may amend their plans to permit employees to use amounts remaining in a health FSA or DCAP at the end of a plan year or grace period ending in 2020 to pay or reimburse expenses incurred through December 31, 2020. This “spend down” extension also applies to a health FSA with a plan year ending in 2020 that has a $500 carryover feature.

This relief only applies to non-calendar year plans or calendar year plans that provide for a grace period (which has otherwise already expired in 2020). Calendar year plans with no grace period do not appear to be able to take advantage of this relief because 2019 calendar year plans already provide for payment of claims incurred through the end of 2020.

Employers choosing to extend health FSA claim periods should be aware of the potential implication it can have on an employee’s ability to contribute to a health savings account (HSA). The IRS’ notice cautions that if the period for incurring claims is extended under a health FSA that is not (or is not amended to be) compatible with a HSA-qualified high deductible health plan (HDHP), an employee with unused amounts remaining at the end of a plan year or grace period ending in 2020 will not be eligible to contribute to an HSA during the extended period.

Plan Amendment and Notice Requirements

Employers must amend their plans to adopt any of the relief described above. Any such amendments will be considered timely if they are made prior to December 31, 2021. Employers wanting to take advantage of any of this relief must notify participants, although the IRS does not specify the time or form of notification. Further guidance is needed for employers to understand their obligation in this regard.

Permanent Inflation-Adjustment Factor Adopted to Health FSA Carryover Limit

In 2013, the IRS issued guidance allowing plans to adopt a carryover provision in which participants could rollover unused amounts of up to $500 to the next plan year. This provision was offered as an alternative to a grace period provision. To date, the $500 carryover limit has not been adjusted for inflation. IRS Notice 2020-33 creates an inflation adjustment by indexing the carryover limit by 20% of the FSA contribution limit (rounded to the next lowest multiple of $50). Because the 2020 health FSA contribution limit, as adjusted for inflation, is $2,750, the carryover limit for 2020 will now be adjusted to $550 (20% of $2,750). This adjustment impacts the 2020 plan year and amounts carried over into 2021. (For the 2019 plan year and amounts carried over into 2020, the limit remains $500.) This change is not temporary. Employers must amend their plans to reflect the inflation adjusted limit if they want to offer employees the maximum carryover allowed. Any amendment to incorporate this change must be adopted no later than the last day of the first plan year beginning in 2021 (December 31, 2021 for calendar year plans).

Relief for HSA-Qualified High Deductible Health Plans (HDHPs)

Notice 2020-33 explains that recent relief allowing HDHPs to provide benefits for COVID-19 testing (and treatment if voluntarily elected) on a no or low deductible basis applies to reimbursements of expenses incurred on or after January 1, 2020 and provides clarifications regarding the items and services covered by this relief. The notice also clarifies that the CARES Act relief regarding telehealth and other remote care services for plan years beginning on or before December 31, 2021 applies with respect to services provided on or after January 1, 2020.

For more information, please contact your Account Manager.

Keenan & Associates is not a law firm and no opinion, suggestion, or recommendation of the firm or its employees shall constitute legal advice. Clients are advised to consult with their own attorney for a determination of their legal rights, responsibilities and liabilities, including the interpretation of any statute or regulation, or its application to the clients’ business activities.