Recent coronavirus-related guidance from the IRS (Notice 2020-29, issued on May 12) aims to give Code Section 125 cafeteria plan (“cafeteria plan”) participants some relief from irrevocable group health benefit and health and dependent care flexible spending account (“FSA”) elections made prior to the pandemic.
Under Notice 2020-29, an employer who offers group health benefits or FSAs through a cafeteria plan may amend the plan to permit participants to:
- Without experiencing a change in status, make a prospective election during 2020 to (1) receive group health coverage previously declined during open enrollment; (2) switch group health coverage options; (3) revoke group health coverage entirely (only upon a written representation that the participant will enroll in coverage not sponsored by the employer); (4) make a new FSA election; or (5) revoke, increase or decrease the amount of an existing FSA election;
- If the plan has an FSA grace period ending in 2020 (or the plan year ends in 2020, whether or not the plan has a grace period), apply grace period balances (which typically become unusable after March 15) or the applicable plan-year-end balances to eligible expenses incurred through December 31, 2020;
- If the plan permits an FSA carryover amount to be applied to eligible expenses incurred in 2020, apply that amount to expenses incurred through December 31, 2020.
Employers have significant flexibility in implementing these changes, if they choose to do so at all. For example, employers may choose to allow participants to switch coverage options, but not permit switches into less generous coverage, to prevent adverse selection. Although changes, if any, should be communicated to participants promptly and the plan operated accordingly, the plan amendment to incorporate these changes does not need to be executed until December 31, 2021.
Importantly, employers with a grace period or carryover rule in effect for FSAs and that choose to extend the reimbursement period through the end of 2020 will inadvertently cause employees benefiting from the extension to be ineligible to contribute to a health savings account (HSA) during the extended period. Employers considering this change should coordinate with service providers and counsel to determine how many participants have unused 2019 FSA grace period, plan year or carryover balances, and the resulting impact on those participants’ 2020 HSA contributions, if any, before implementing this change (which must be offered in a nondiscriminatory manner). This potential pitfall does not apply to extensions of the reimbursement period for limited purpose FSAs, which may be freely offered in tandem with HSAs.
Note: The IRS also issued Notice 2020-33 on May 12, which increases the ceiling on FSA carryovers (for those plans that offer them) to 20% of the indexed Section 125(i) limit, which results in an effective $550 carryover limit for contributions related to the 2020 plan year. This increased ceiling does not apply to carryovers of 2019 FSA balances discussed above, but rather to carryovers from the 2020 plan year, which are generally applied to expenses incurred in 2021. Plans do not need to offer the maximum carryover amount or offer a carryover provision at all. This change is not related to the pandemic, but rather was a technical change to account for the fact that the previous limit was not indexed to inflation, and the change will thus affect plan years beyond 2020. However, the requirement that a cafeteria plan may not contain both a grace period and a carryover feature continues to apply.