IRS Issues Comprehensive Guidance for Section 125 Plans in Response to COVID-19
On May 12, 2020, in order to assist with the nation’s response to COVID-19, the Internal Revenue Service (“IRS”) issued Notice 2020-29 and Notice 2020-33 respectively.
Notice 2020-29 provides increased flexibility for cafeteria plans, unused amounts in health FSAs, and unused amounts in dependent care assistance programs. Notice 2020-29 also clarifies some COVID-19 related provisions regarding health savings account (“HSA”) eligible high deductible health plans (“HDHPs”).
Notice 2020-33 increases the carryover limit of unused amounts remaining as of the end of a plan year in a health FSA under a Section 125 cafeteria plan. The increase in amount reflects indexing for inflation and parallels the indexing applicable to the limit on salary reduction contributions under Section 125(i) of the Code.
Notice 2020-33 also clarifies the ability of a health plan to reimburse individual insurance policy premium expenses incurred prior to the beginning of the plan year for coverage provided during the plan year. This will assist with the implementation of individual coverage health reimbursement arrangements (“ICHRAs”).
Herein we provide an overview of the provisions in these Notices that address some of the many Section 125 Cafeteria Plan questions and issues raised by plan sponsors, administrators, and participants as a result of the COVID-19 pandemic.
Notice 2020-29 Mid-Year Elections Under a Section 125 Cafeteria Plan
Notice 2020-29 provides temporary flexibility for Section 125 cafeteria plans to permit employees to make certain prospective mid-year election changes for employer-sponsored health coverage, health FSAs, and dependent care assistance programs during the 2020 calendar year.
Employers may amend one or more of its Section 125 cafeteria plans to allow employees to:
• make a new election for employer-sponsored health coverage on a prospective basis, if the employee initially declined to elect employer sponsored health coverage;
• revoke an existing election for employer-sponsored health coverage and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis (including changing enrollment from self-only coverage to family coverage);
• revoke an existing election for employer-sponsored health coverage on a prospective basis, provided that the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not
sponsored by the employer;
• revoke an election, make a new election, or decrease or increase an existing election regarding a health FSA on a prospective basis; and
• revoke an election, make a new election, or decrease or increase an existing election regarding a dependent care assistance program on a prospective basis.
To accept an employee’s revocation of an existing election for employer-sponsored health coverage, the employer must receive from the employee an attestation in writing that the employee is enrolled, or immediately will enroll, in other comprehensive health coverage not sponsored by the employer.
The Notice provides an example of an acceptable written attestation.
Employers utilizing this relief under Section 125 are not required to provide unlimited election changes but may use discretion to determine the extent to which such election changes are permitted and applied.
Any permitted election changes an employer adopts must meet the following:
• Be applied on a prospective basis only;
• Not result in failure to comply with the nondiscrimination rules applicable to Section 125 cafeteria plans; and
• Comply with the notice requirements under Title I of ERISA.
This relief applies to both employers sponsoring self-insured plans and employers sponsoring insured plans.
This relief applies to all health FSAs, including limited purpose health FSAs compatible with HSAs. With respect to health FSAs and dependent care assistance programs, employers are permitted to limit mid-year elections to amounts no less than amounts already reimbursed.
Although Notice 2020-29 permits this flexibility temporarily in response to the public health emergency posed by COVID-19, the relief is not limited to individuals affected by the pandemic.
This relief may be applied retroactively to periods prior to the issuance of the Notice and on or after January 1, 2020.
Extended Claims Period for Health FSAs and Dependent Care Assistance Programs
The Notice provides flexibility for a Section 125 cafeteria plan to provide an extended period to apply unused amounts remaining in a health FSA or dependent care assistance program in order to pay or reimburse medical care expenses or dependent care expenses.
An employer may amend one or more of its Section 125 cafeteria plans to permit employees to apply unused amounts remaining in a health FSA or a dependent care assistance program as of the end of a grace period or a plan year ending in 2020 to pay or reimburse expenses incurred for the same qualified benefit through December 31, 2020.
For example, if the grace period in a plan ended on March 15, 2020, the
employer could amend the plan to permit employees to apply unused
amounts remaining in an employee’s health FSA to reimburse the
employee for medical care expenses incurred through December 31,
Relief applies to all health FSAs, including limited purpose health FSAs compatible with HSAs.
Health FSA amounts may only be used for medical care expenses, and dependent care assistance program amounts may only be used for dependent care expenses.
The extension of time for incurring claims is available both to Section 125 cafeteria plans that have a grace period and plans that provide for a carryover.
Caution Employers! Adopting an amendment to extend the period to
incur health FSA expenses will make employees ineligible for HSA during
the extended period.
An individual who had unused amounts remaining at the end of a plan year or grace period ending in 2020 and is allowed an extended period to incur expenses under a health FSA pursuant to a plan amended in accordance with this Notice will not be eligible to contribute to a HSA during the extended period (except in the case of a HSA-compatible health FSA, including a health FSA that is amended to be HSA-compatible).
An employer that decides to amend its cafeteria plan to provide for any of the changes stated in the Notice must adopt a plan amendment. The amendment for the 2020 plan year must be adopted on or before December 31, 2020 and may be effective retroactively to January 1, 2020, provided the employer informs all employees eligible to participant in the cafeteria plan of the changes.
Notice 2020-33 Modification of Permissive Carryover Rule for Health FSAs
Previously, a Section 125 cafeteria plan could allow up to $500 of unused amounts in a participant’s health FSA as of the end of a plan year to be carried over to pay or reimburse the participant for medical care expenses incurred in the immediately following plan year.
The Notice increases the maximum $500 carryover amount for a plan year to an amount equal to 20% of the maximum salary reduction contribution under Section 125(i) for that plan year.
The maximum unused amount from a plan year starting in 2020 allowed to be carried over to the immediately following plan year beginning in 2021 is $550 (20% of $2,750, the indexed 2020 limit under Section 125(i)).
Individuals who, during 2020, wish to increase their health FSA contributions, or begin to make health FSA contributions, as a result of the increased carryover amount permitted under the Notice may do so, if permitted by amendment to the Section 125 plan, as discussed above.
Although salary reductions may only be made on a prospective basis, any amounts contributed to the health FSA after the revised election may be used retrospectively for any medical care expense incurred during the first plan year that begins on or after January 1, 2020.
Timing for Reimbursements by Health Plans
A health plan, including a premium-reimbursement plan in a Section 125 cafeteria plan or an ICHRA, may not reimburse medical care expenses incurred before the beginning of the plan year and qualify for exclusion from income and wages. Medical care expenses are treated as incurred when the covered individual is provided the medical care that gives rise to the expense, and not when the amount is billed or paid.
The Notice provides that a plan is permitted to treat an expense for a premium for health insurance coverage as incurred on:
• the first day of each month of coverage on a pro rata basis; and
• the first day of the period of coverage; or the date the premium is paid.
Thus, for example, an ICHRA with a calendar year plan year may immediately reimburse a substantiated premium for health insurance coverage that begins on January 1 of that plan year, even if the covered individual paid the premium for the coverage prior to January 1.
The content herein is provided for educational and informational purposes only and does not contain legal advice. Please contact our office if you have any questions about compliance requirements applicable to your employee benefit plans or other HR compliance matters.
Dated: June 23, 2020