On May 12, 2020, the IRS provided additional flexibility for cafeteria plans (section 125 plans) and FSA plans in the form of Notices 2020-29 and 2020-33 (the “Notices”). The Notices loosen restrictions on these types of plans, and plan sponsors may implement all, some or none of the changes in their discretion. Below is a summary of these new plan options, along with important details on plan amendment deadlines and other restrictions.
Under IRS Notice 2020-29, plans may permit mid-year elections in the following circumstances:
Elections of health coverage
Health flexible spending account (FSA)
Dependent care assistance programs
These expanded mid-year election options are available for calendar year 2020 and can be made on a prospective basis only. As noted above, these options are available to participants at the plan sponsor’s discretion: a sponsor may choose to permit only certain mid-year elections and may choose to limit the number of mid-year election changes. Should a plan utilize the relief described above, there is no requirement that individuals must be personally affected by the pandemic to make the mid-year elections described above.
Relief may apply to prior mid-year elections made on or after 1/1/2020
The IRS is aware that many plan sponsors allowed certain mid-year elections in 2020 without waiting for official guidance. Plan sponsors in this position are allowed to apply the relief in Notice 2020-29 retroactively to mid-year elections made on or after January 1, 2020.
Plan amendment deadline
A plan amendment reflecting utilization of this relief is not required until December 31, 2021.
Under IRS Notice 2020-29, health FSAs and dependent care assistance programs may allow unused amounts remaining as of the end of a grace period or plan year ending in 2020 to be used to pay for or reimburse qualifying expenses through December 31, 2020. While this relief applies regardless of whether a plan contains a grace period or a carry-over, a calendar year plan with a carry-over is unable to take advantage of this relief. Similar to the relief above, plan sponsors have the discretion whether to allow this plan change. Importantly, a participant’s extension of the FSA reimbursement period under this option effectively will be an extension of coverage by a health plan that is not a high deductible health plan (“HDHP”) for purposes of determining whether an employee is eligible to contribute to a health savings account.
Plan amendment deadline
Plan sponsors desiring to utilize this relief must complete a plan amendment by December 31, 2021.
In addition to the changes above, Notice 2020-29 extends earlier relief provided to HDHPs (under IRS Notice 2020-15). Under this relief, a health plan otherwise satisfying HDHP requirements will not fail to be an HDHP merely because the health plan provides participants with medical care related to the testing and treatment of COVID-19 prior to their satisfying the minimum deductible. This relief is now available retroactively to January 1, 2020.
Under current rules, health FSAs may, in lieu of a grace period, allow up to $500 in remaining balances to be carried over from one year to the next. Under Notice 2020-33, the maximum amount will be indexed to inflation. With this revision, the maximum carryover amount for 2020 is $550.
Plan amendment deadline
To take advantage of this relief, plan sponsors generally must amend their plan by the end of the plan year for which the maximum carryover is revised. For example, an employer with a calendar year plan that wishes to apply the increased carryover maximum in 2022 must adopt a plan amendment by December 31, 2022. However, for the 2020 plan year, employers have until December 31, 2021 to adopt an amendment. If a plan document incorporates a maximum carryover amount by reference to the Code, rather than stating a fixed amount, no amendment is necessary.
If you would like to implement any of these changes for your participants, or if you have questions about how they may impact your plan, please contact Thompson Coburn’s Employee Benefit attorneys for guidance.
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