United States: IRS Issues Guidance Related To Changes In Elections, Grace Periods, And Carryovers

As part of its ongoing efforts to help those who have been impacted by the health care and economic fallout from the Covid-19 pandemic, the IRS recently released two pieces of sub-regulatory guidance making it easier for participants to change their cafeteria plan elections and not forfeit funds in their flexible spending arrangements (FSAs). Notice 2020-29 provides relief for cafeteria plans in response to the current Covid-19 pandemic, and Notice 2020-33 provides a permanent increase to the carryover limit for health FSAs.

Due to the Covid-19 pandemic, many employees' reasonable expectations regarding medical and childcare expenses have significantly changed since they made their coverage elections for this year. For example, an employee may have waived health coverage for a child and now realized the child needs coverage because the child is home from college. Or, the employee may incur much less in medical and dependent care expenses this year because doctor, dentist, physical therapist, and childcare centers have been closed for months, with no signs of widespread or sustained re-openings in much of the country. On the other hand, an employee may incur significantly more in medical and dependent care expenses because he or she had Covid-19 or needed childcare because of school closures.

Notice 2020-29 provides some much-needed flexibility for mid-year election changes under an employer's cafeteria plan to help account for the fallout from the pandemic. It also extends the periods after which participants must forfeit FSA balances. This is welcome news for employers that want to be able to accommodate their employees' needs without running afoul of the cafeteria plan rules.

Unrelated to Covid-19, Notice 2020-33 provides additional welcome relief in the form of a modest increase in the carryover limit of unused amounts remaining as of the end of a plan year in a health FSA. Notice 2020-33 also clarifies the ability of a health reimbursement arrangement (HRA) to reimburse premium expenses incurred prior to the beginning of the plan year for coverage provided during the plan year.

We summarize the provisions of the two Notices below.

CAFETERIA PLAN MID-YEAR ELECTION CHANGES

An employer may allow employees to make prospective election changes during calendar year 2020 regarding employer-sponsored health coverage, health FSAs, and dependent care FSAs, regardless of whether the basis for the election change satisfies the existing criteria in the cafeteria plan regulations.1 Notice 2020-29 explicitly permits employers to limit the period during which employees may make these midyear election changes

In particular, Notice 2020-29 permits an employer to allow employees to do the following:

• Elect Employer-Sponsored Health Coverage: Make a new election to enroll in employersponsored health coverage on a prospective basis if the employee initially declined to elect employer-sponsored health coverage.
• Decline Employer-Sponsored Health Coverage:
  • Revoke an existing election for employersponsored health coverage and make a new election to enroll in different employer-sponsored health coverage on a prospective basis (including changing enrollment from selfonly to family coverage).
  • Revoke an existing election for employersponsored health coverage on a prospective basis, provided that the employee attests in writing that the employee is enrolled, or immediately will enroll, in other comprehensive health coverage not sponsored by the employer. An employer may rely on an employee's written attestation, unless the employer has actual knowledge that the employee is not, or will not be, enrolled in such other comprehensive health coverage. The Notice provides an example of an acceptable written attestation.
• Changes to Health FSA Contributions: Revoke an election, make a new election, or decrease or increase an existing health FSA election on a prospective basis.
• Changes to Dependent Care FSA Contributions: Revoke an election, make a new election, or decrease or increase an existing dependent care FSA election on a prospective basis.

Note while some of these changes may have already been permissible under the cafeteria plan change in election rules, the ability to drop health coverage and increase or decrease health FSA elections offers additional flexibility that was not previously available under the cafeteria plan rules. Notice 2020-29 specifically states that an employer may wish to consider limiting its potential financial exposure with respect to employees decreasing their FSA elections by limiting mid-year elections to amounts no less than amounts already reimbursed.

Notice 2020-29 does not define the term ''employer-sponsored health coverage,'' but it appears for this purpose to include dental and vision coverage as well as medical coverage. The Notice makes it clear that it only encompasses benefits that are excludable from an individual's gross income under §105 or §106. Thus, the Notice does not apply to other benefits, such as life insurance or vacation buy/ sell.

The changes permitted by Notice 2020-29 are effective on January 1, 2020, and last through December 31, 2020, provided that all election changes may be prospective only. Mid-year election changes only apply during calendar year 2020, and they apply to all employees eligible to participate in the cafeteria plan, not just to individuals effected by Covid-19.

All of these changes are optional, so an employer could choose to continue to apply their existing cafeteria plan rules pertaining to election changes rather than adding these new election change rules for 2020.

Additionally, an employer could choose to implement some of the changes permitted under the Notice but not all.

If an employer would like to allow these changes, it must amend its cafeteria plan to reflect these changes on or before December 31, 2021. The employer must, however, currently inform all employees eligible to participate in the cafeteria plan of the changes it will adopt.

EXTENDED CLAIMS PERIOD FOR HEALTH FSAs AND DEPENDENT CARE FSAs

An employer may permit employees to apply unused health and dependent care FSA amounts remaining as of the end of a grace period ending in 2020 or a plan year ending in 2020 to pay or reimburse health and dependent care expenses, respectively, incurred through December 31, 2020.

This extension of time is available both to cafeteria plans that have a grace period and cafeteria plans that have a carryover. A calendar year plan with a carryover will not gain any additional flexibility by adopting this rule, however, because the extended time period ends on December 31, 2020. Such a plan can, however, allow a carryover of unused amounts into the 2021 plan year under the general carryover rules.

Notice 2020-29 states that an individual is ineligible to contribute to a health savings account (HSA) during the extended claims period for a general purpose health FSA. Thus, employers that offer an HSAcompatible high deductible health plan (HDHP) should be mindful of this if they choose to extend the claims period. This is especially true if the grace period or plan year has already ended (e.g., for a calendar year plan with a grace period that ended on March 15, 2020) because employees may have already contributed to HSAs for past months

Notably, Notice 2020-29 does not permit a cash out of unused FSA balances.

The changes permitted by Notice 2020-29 are effective for grace periods and plan years that end in 2020. The changes apply to all FSA plan participants, not just those affected by Covid-19.

The relief provided by Notice 2020-29 is optional, and may be of limited utility to a calendar year FSA plan, unless the plan has a grace period and a large number of participants forfeited money when that grace period ended.

An employer wishing to utilize the relief must amend its cafeteria plan and FSA plans to reflect these changes on or before December 31, 2021. The employer must, however, currently inform all employees eligible to participate in the cafeteria plan of the changes it will adopt.

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Originally published 12 June, 2020

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.