IRS: Cafeteria plan sponsors to receive increased flexibility
On May 12, 2020, the IRS issued guidance to allow Section125 cafeteria plan sponsors increased flexibility with respect to mid-year election changes during calendar year 2020 related to health coverage, health FSAs, and dependent care assistance programs. The guidance also provides increased flexibility with respect to grace periods to apply unused amounts in health FSAs to medical care expenses incurred through December 31, 2020, and unused amounts in dependent care assistance programs to dependent care expenses incurred through December 31, 2020. The increased flexibility is completely optional.
In addition, the IRS issued separate guidance to increase the maximum health FSA carryover amount to $550, starting with the 2020 plan year.
Mid-Year Election Changes
Generally, cafeteria plan elections must be irrevocable during the plan year. Plans may allow mid-year election changes for certain qualifying events, such as: change in marital status, change in the number of eligible dependents, birth or adoption of a child, loss of a dependent, etc. Given the new guidance, as a result of the COVID-19 pandemic, cafeteria plan sponsors may now amend their Section 125 plan to permit the following mid-year election changes:
- Make a new election for employer-sponsored health coverage on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage;
- Revoke an existing election for employer-sponsored health coverage and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis (including changing enrollment from self-only coverage to family coverage);
- Revoke an existing election for employer-sponsored health coverage on a prospective basis, provided that the employee attests in writing that the employee 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 regarding a health FSA on a prospective basis; and
- Revoke an election, make a new election, or decrease or increase an existing election regarding a dependent care assistance program on a prospective basis.
All of these options only permit prospective changes and apply only to calendar year 2020.
In addition, the Notice confirms that employers can chose to limit a mid-year health FSA and or dependent care FSA election revocation or decrease to amounts no less than amounts already reimbursed to the employee by the health FSA or dependent care FSA in the plan year.
Grace Periods for FSAs
A grace period is a pre-defined timeframe after the plan year ends that enables participants to spend down any remaining balance from the previous year. For plans on the calendar year (January 1 – December 31), grace periods often ended March 15 of the following year. Employers may now amend their plans to allow for participants to use their unused health FSA, Dependent Care FSA, or Limited Purpose FSA funds. The guidance applies to grace periods ending in 2020 or a plan year ending in 2020, allowing the spending extension to end December 31, 2020. Sponsors of health FSAs that have a carryover feature also may adopt a grace period, for the 2020 plan year only.
Increased Health FSA Carryover Amount
For health FSAs with a carryover feature, the maximum carryover amount is increased from $500 to $550, as of the 2020 plan year.
Effective Date and Plan Amendments
Plan amendments for these optional changes must be adopted by December 31, 2021, and can be retroactive to January 1, 2020, provided the plan is operated in accordance with the terms of the amendments and all employees that are eligible to participate in the Section 125 plan are informed of the changes.
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Our health and welfare compliance updates are designed to provide useful information to organizations about the operation and management of their employee benefit plans. Although we go to great lengths to ensure that only accurate and timely information is provided, we recommend that you consult with an attorney for professional assurance that our information, and your interpretation of it, is appropriate for your particular situation. Nothing provided herein should be construed as legal or tax advice.