The IRS and the Treasury Department, acknowledging the widespread impact of COVID-19, have issued Notice 2020-29 and Notice 2020-33, granting much-sought flexibility for flexible spending accounts (“FSAs”) and health plans. Though the Section 125 cafeteria plan rules applicable to FSAs and health plans already permitted some limited election changes in the case of changes in status (for example, in the event of significant cost or coverage changes), they did not address the wide array of changes that many participants have wanted to make based on the ripple effects of the COVID-19 crisis. In addition, the existing Section 125 rules required that any change to the election be consistent with (as determined under the rules) and on account of the applicable change in status.
Notably, the relief permits plan sponsors to amend their Section 125 cafeteria plans to allow all employees eligible to make contributions under the plan to make prospective changes to their elections regarding employer-sponsored health coverage, health FSA coverage and dependent care FSA coverage for calendar year 2020, whether or not they are affected by the COVID-19 pandemic. This includes permitting eligible employees who had not previously made elections to make initial elections, and permitting eligible employees to change, increase, decrease or revoke elections regardless of whether they meet the change in status rules generally applicable to these types of plans. If an employee seeks to revoke an election for employer-sponsored health coverage, that employee must provide a written attestation that the employee is enrolled in or will immediately enroll in other comprehensive health coverage. The IRS provided a model form attestation that can be used for this purpose.
Employers should carefully consider available design decisions before implementing the changes permitted under the Notices, as employers that wish to take advantage of this flexibility also have the ability to make key plan design decisions – for example, employers may determine which changes will be permitted and may utilize a shorter time frame during which election changes can be made than would otherwise be permitted under the guidance. The IRS suggests, and we agree, that employers may want to consider limiting elections to “prevent adverse selection” and limiting changes to no less than the amounts already reimbursed. For example, without such a limitation, an employee who had already received full reimbursement under a health care FSA could revoke his or her election prospectively and stop making contributions to the health care FSA for the year – leaving the employer responsible for making up the shortfall. In any event, employers must ensure that changes do not result in nondiscrimination failures.
Plan sponsors may also amend their Section 125 plans to address the following:
- A health or dependent care FSA with a grace period ending in 2020 or a plan year ending in 2020 may permit employees with unused amounts in the employee’s health or dependent care FSA as of the end of the plan year or grace period to be used to reimburse the employee for medical care expenses (with respect to the health FSA) or dependent care expenses (for the dependent care FSA) incurred through December 31, 2020.
- As a result of indexing added by the Notices, the maximum $500 health FSA permissible carryover limit was increased as a to $550 beginning in 2021. For future years, the maximum will be increased based on the maximum permitted FSA contribution limit.
Plan sponsors generally have until December 31, 2021 to adopt amendments retroactive to January 1, 2020, as long as the employer informs all individuals eligible to participate in the plan of the changes and operates the plan in accordance with the notices. Note that these amendment deadlines apply only to the changes permitted by the Notices and not to other changes to FSAs or health plans.
The Notices also provide helpful revisions to prior guidance, including that telehealth, COVID testing and treatment relief previously provided to high deductible health plans (and discussed in our prior alerts) will now be effective for expenses incurred on or after January 1, 2020, and provide additional flexibility related to expense timing for premium reimbursement plans.
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