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The IRS has issued new guidance to assist employers and employees as they navigate the financial impact of COVID-19. The guidance namely allows cafeteria plan participants to change their plan elections midyear and extends the deadline to use money remaining in Flexible Spending Accounts (FSA) and dependent care assistance programs.

Since the beginning of the COVID-19 pandemic, employers have asked how they can help ensure their employees retain health benefits during business interruption.

The majority of health insurance carriers and stop loss carriers responded by temporarily relaxing “actively at work guidelines” due to COVID-19 related employment changes. If employees had reduced hours, were laid off, had extended PTO/Sick Days, or were furloughed, most carriers have allowed employees to remain on the group health plan as an active employee.

The latest IRS guidance takes this concept one step further with Notices 2020-29 and 2020-33.

Special 2020 Midyear Election Changes

Health Coverage
Cafeteria plan elections are generally irrevocable and must be made prior to the first day of the plan year. Typically, the only way to alter elections is if the employee has a qualifying life event (e.g., gets married, has a baby, loses benefits from a spouse’s plan, etc.).

Under Notice 2020-29, however, an employer cafeteria plan (including both self-insured and fully insured plans) may permit eligible employees to:

  • Make a new, prospective election for coverage if they initially declined employer-sponsored health coverage.
  • Revoke an existing election and make a new, prospective election to enroll in different employer-sponsored health coverage.
  • Revoke an existing election on a prospective basis.
    • Employees must attest in writing they are or will be enrolled in other health coverage not sponsored by the employer.
    • IRS provided model attestation language in Notice 2020- 29.

FSA and Dependent Care
Notice 2020-29 also allows midyear election changes for health FSAs and dependent care assistance programs. Cafeteria plans may permit eligible employees to:

  • Revoke an election.
  • Make a new election.
  • Decrease or increase an existing election on a prospective basis.

To protect against loss, employers may limit midyear health FSA and dependent care election changes to amounts no less than amounts already reimbursed.

Optional and Temporary
Special midyear election changes are optional. Employers may choose to add these permissible election changes, but they are not required to add them.

Further, employers don’t need to allow participants to make unlimited elections changes under the new rules. For example, employers may limit election changes to increase coverage only. When considering limitations on election changes, employers should review compliance with any other relevant rules or regulations, including cafeteria plan nondiscrimination rules.

The election changes are permissible only for the 2020 plan year. To implement these changes, an employer must amend its cafeteria plan by December 31, 2021.

Notably, the guidance doesn’t address whether “employer sponsored health coverage” includes certain other benefits like dental and vision coverage. The current opinion of most attorneys is that it applies to group health plans only.

Additionally, an employer should obtain written agreement from its insurers and/or stop loss carriers to ensure they will allow these changes to underlying health coverage.

Extended FSA & Dependent Care Claims Period

Cafeteria plans may temporarily extend grace periods ending March 15, 2020, to reimburse medical care expenses or dependent care expenses incurred through Dec. 31, 2020.

Health FSAs and dependent care assistance programs usually work on a “use it or lose it” system that limits the amount of money that can be carried over from plan year to plan year.

With a grace period, employees are given time immediately following the plan year to use the remaining funds to pay any new medical claims or childcare expenses incurred before the end of the grace period. For example, if your plan year ended on Dec. 31, 2019, employees would have had until March 15, 2020, to spend any leftover funds to pay for care received Jan. 1, 2019 – March 15, 2020.

Employees would forfeit any funds left in the accounts after March 15. Under Notice 2020-29, employers can instead allow employees to keep and use those funds for expenses incurred through Dec. 31, 2020.

Employers that wish to extend the claims period for health FSA and dependent care assistance programs must amend their cafeteria plans on or before December 31, 2021.

Retroactive Application of HDHP and
Telemedicine Guidance

Notice 2020-29 retroactively extends an exemption for telehealth and remote services for High Deductible Health Plans (HDHP) that was established in the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

The CARES Act allowed HDHPs to cover telehealth and remote services related to testing and treatment of COVID-19 without requiring employees to meet their (high) deductible, and without affecting employees’ ability to contribute to their health savings account.

With this IRS guidance, the CARES exemption now covers telehealth services back to Jan. 1, 2020, for plan years starting on or before December 31, 2021.

This retroactive exemption, however, doesn’t impact the COVID-19 testing coverage mandates under the CARES Act or Notice 2020-15, including the requirement that health plans provide first dollar coverage for COVID-19 testing services.

Employers who wish to extend exemption must amend their cafeteria plans on or before December 31, 2021. The amendment can apply retroactively through Jan. 1, 2020.

Increased Maximum Amount for Health FSA Carryover

Unrelated to COVID-19, the IRS also released permanent guidance increasing the maximum amount of money that can be “carried over” in a health FSA year-to-year.

Notice 2020-33 increases the amount of unused health FSAs funds that may be carried over at the end of a plan year to pay for medical expenses incurred during the following plan year. The permanent carryover amount will be equal to 20 percent of the maximum salary reduction contribution announced for the plan year.

For 2020, the maximum amount that may be carried over to 2021 is $550.

Employers will need to amend their cafeteria plans to allow for the increased carryover amount. If employers want to implement this change for the 2020 plan year, they must adopt this amendment on or before December 31, 2021.

To avoid repeat amendments, an employer may amend the plan to incorporate the maximum carryover permitted by law, as adjusted for inflation. (Many plans already take this approach for annual changes to the maximum salary reduction contribution to a health FSA).

Additional Guidance Available

For additional guidance and resources related to COVID-19, please visit our Coronavirus Resources page and contact us. Our trusted advisors have the industry knowledge to help you manage your risk and protect your assets.

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