Employers offering section 125 cafeteria plans have the option of extending new relief to plan participants following recent guidance from the IRS and the Department of the Treasury.
The guidance, released May 12, 2020, was issued in two separate IRS notices. IRS Notice 2020-29 gives employers the option of adding a plan amendment to allow certain mid-year election changes and longer claims grace periods for cafeteria plans during the 2020 plan year. It also clarifies previous legislation on telehealth and high-deductible health plans (HDHPs). Notice 2020-33 allows employers to add a plan amendment that would increase the maximum carryover amount of health flexible spending accounts (FSAs). It also clarifies rules on reimbursements of health insurance premiums by individual coverage health reimbursement arrangements (ICHRAs).
The updates are meant to provide relief during the COVID-19 pandemic and come on the heels of recent Department of Labor (DOL) guidance that extends deadlines for COBRA and other ERISA plans.
Though applicable to many kinds of cafeteria plans, the new guidance is especially relevant for health and dependent care FSAs.Mid-year election plan changes
Generally, cafeteria plan elections must be made before the first day of the plan year and are irrevocable. Plans can allow for mid-year election changes following certain “change in status” events (like termination of employment), but plan participants are usually locked into what they’ve chosen for the year.
COVID-19 complicates these decisions. Health coverage is now more important than ever, and plan participants face fluctuating budgets in the uncertain economy. The election choices they made at the beginning of the plan year may no longer be the right fit.
To offer relief, Notice 2020-29 allows employers to amend their section 125 cafeteria plans to permit employees to make certain election changes during the 2020 calendar year.
- Making new elections to participate in employer-sponsored health coverage if the employee initially declined it
- Changing enrollment to a different health coverage option offered by the employer
- Revoking existing elections to employer-sponsored health coverage completely, provided the employee attests in writing that they’re enrolled – or will immediately enroll – in other comprehensive health coverage not provided by the employer
- Making new elections, revoking existing elections or increasing or decreasing an election to a health FSA or dependent care FSA
Employers who decide to extend relief can choose which changes they will permit. Any plan amendments must be adopted before December 31, 2021, and can be retroactive to January 1, 2020 (provided the plan is operated in accordance with the rules of the notice).
The notices also allows employers to limit mid-year election changes for health and dependent care FSAs to amounts no less than amounts already reimbursed.
Employers must notify employees of the changes made.
extended claims grace periods and higher carryover amounts
Notice 2020-29 also extends the amount of time employees have to use the remaining balances in their FSA at the end of the plan year.
Generally, FSAs have a “use-it-or-lose-it” rule, meaning employees forfeit any amounts they haven’t used at the end of the plan year. Plans may provide a grace period of up to two months and 15 days during which employees can use their remaining balances to be reimbursed for eligible medical expenses incurred during the grace period.
The relief allows employers to amend their FSAs to permit employees to apply unused funds as of the end of a grace period ending in 2020 (or a plan year ending in 2020, for off-calendar plans) to pay for or reimburse eligible expenses through December 31, 2020.
This extension is available to cafeteria plans with a grace period as well as to plans with a carryover. However, anyone who has unused amounts at the end of the plan year or a grace period ending in 2020 and is given the new extended grace period relief won’t be eligible to make health savings account (HSA) contributions during the extended period (except in the case of a limited-purpose FSA).
Notice 2020-33 offers further optional changes to carryover amounts. Currently, employers can choose to allow annual rollover amounts of up to $500 for health FSAs. The notice allows employers to adopt a plan amendment that increases that amount to an amount equal to 20 percent of the maximum health FSA salary reduction contribution for that plan year (set in the Internal Revenue Code and indexed for inflation).
The maximum carryover amount for a 2020 plan year into a 2021 plan year is $550. Employers must adopt the amendment by December 31, 2021 and can apply it retroactively to the 2020 plan year.
Unlike the provisions of Notice 2020-29, this guidance isn’t time-limited and will apply indefinitely.
Notice 2020-29 also clarifies a provision passed in the CARES Act on telehealth and high-deductible health plans (HDHPs).
Previously, HDHPs could not cover telehealth services pre-deductible without sacrificing policyholders’ ability to open or contribute to an HSA. The CARES Act attempted to increase the availability of telehealth services, which are critical to slowing the spread of disease, by allowing HDHPs and plan sponsors to cover telehealth before the deductible without preventing policyholders from opening or contributing to an HSA.
The change, effective as of March 27, 2020, applies for plan years beginning on or before December 31, 2021. The notice clarifies that telehealth services provided on or after January 1, 2020 will be permitted in an HSA-qualified HDHP.
individual coverage hras (ICHRAs)
An ICHRA is designed to allow employers to reimburse employees for health insurance coverage.
Notice 2020-33 clarifies that ICHRAs are permitted to consider health care premiums “incurred” on any of the following:
- The first day of each month of coverage
- The first day of the period of coverage
- The date the premium is paid
This means employee can be reimbursed for premiums paid before the beginning of the plan year if the coverage starts during the plan year. For example, premiums paid in December 2019 for coverage beginning January 1, 2020 can be reimbursed during the ICHRA’s 2020 plan year.
what employers should consider when deciding to extend relief
This new guidance gives employers more flexibility in using their FSAs and other cafeteria plans to address employee concerns during the COVID-19 pandemic.
However, all relief is optional. Employers considering amending their plans in line with the guidance should consider their unique circumstances and all possible outcomes.
To get started, think the through the following:
- The potential for adverse selection. Adverse selection occurs when sicker employees elect into a health plan and healthier employees opt out, ultimately driving up costs. If employers feel this may be a problem, they could either not allow mid-year election changes or choose to cover only instances in which the employee’s coverage will be increased or improved. For example, an employer could choose to only allow employees to switch from self-only to family coverage or from a less comprehensive plan to a more comprehensive one.
- How HSA use may be impacted. Individuals who have unused amounts remaining at the end of the plan year or 2020 grace period will be ineligible to make HSA contributions if they are allowed the extended grace period. Employers who have HDHPs and facilitate employees’ HSAs should make sure adopting an extended claims grace period doesn’t hurt employees who want to contribute to their HSA. (This guidance doesn’t affect limited-purpose FSAs).
- Budget capacity. Employers should also consider what changes their budget can support. They may not be able to afford new mid-year elections into their health plan, for example. They should plan accordingly and either not adopt these changes or limit the budgetary strain where possible. Remember, employers are permitted to limit mid-year election changes for health and dependent care FSAs to amounts no less than amounts already reimbursed.
- Administrative capacity. Accommodating a variety of mid-year election changes and extended claims grace periods will require additional effort. Employers should work with their benefits administrator to understand the extra time and responsibilities required to fulfill plan changes.
Employers who decide to extend any relief to employees must follow all stated timelines.
Amendments allowing mid-year cafeteria plan election changes and the extension of the grace period must be adopted before December 31, 2021 and can be retroactive to January 1, 2020. Amendments allowing higher carryover amounts for health FSAs must be adopted on or before the last day of the plan year from which amounts may be carried over, and must be effective retroactively for the first day of the plan year. For 2020, however, the change must be adopted by December 31, 2021 and can be retroactive to the 2020 plan year.
Employers must notify eligible employees of the changes they’ve made and should ensure employees understand and are comfortable with their new benefits options.
healthequity can help
We’re working hard to determine what’s needed to facilitate the new guidance and extend plan amendment options for employers.
Visit our COVID-19 response page for future updates.
HealthEquity does not provide legal, tax or financial advice. Always consult a professional when making life changing decisions.