IRS Offers Guidance and Flexibility for Employee Benefit Plans

IRS Offers Guidance and Flexibility for Employee Benefit Plans

The Internal Revenue Service today released guidance to allow temporary changes to section 125 cafeteria plans. These changes extend the claims period for healthcare flexible spending arrangements (FSAs) and dependent care assistance programs and allow taxpayers to make mid-year changes.

The guidance issued today addresses unanticipated changes in expenses because of the 2019 Novel Coronavirus (COVID-19) pandemic and provides that previously provided temporary relief for high deductible health plans may be applied retroactively to January 1, 2020, and it also increases for inflation the $500 permitted carryover amount for health FSAs to $550.

Notice 2020-29 (PDF) provides greater flexibility for taxpayers by:

  • extending claims periods for taxpayers to apply unused amounts remaining in a health FSA or dependent care assistance program for expenses incurred for those same qualified benefits through December 31, 2020.
  • expanding the ability of taxpayers to make mid-year elections for health coverage, health FSAs, and dependent care assistance programs, allowing them to respond to changes in needs as a result of the COVID-19 pandemic.  (Many employers already embraced this for Dependent Care accounts as many daycares are closed, and one or both parents are home and thus cannot incur daycare and afterschool care expenses).
  • Generally, we have not recommended mid-year enrollment to an employer’s health plans due to the adverse selection they would face, and the stop-loss approval that self-funded plans would need to obtain.  With Notice 2020-29, the IRS is waiving any Section 125-based objections to a mid-year enrollment (or disenrollment) for health coverage. (Sample written employee attestation is available on page 8 of the 15-page PDF).
  • applying earlier relief for high deductible health plans to cover expenses related to COVID-19, and a temporary exemption for telehealth services retroactively to January 1, 2020.

Notice 2020-33 (PDF) responds to Executive Order 13877, which directs the Secretary of the Treasury to “issue guidance to increase the amount of funds that can carry over without penalty at the end of the year for flexible spending arrangements.”  The notice increases the limit for unused healthcare FSA carryover amounts from $500, to a maximum of $550, as adjusted annually for inflation.

Note:  The Healthcare FSA per employee maximum for 2020 is $2,750.  And, this guidance would permit a plan to increase their rollover amount up to $550. The deadline to implement this increase, by written plan amendment is the last day of the plan year.

A plan may adopt these optional changes via a simple Summary of Material Modifications (SMM) which can be mailed (or e-mailed if the population meets the criteria for electronic distribution).

Please contact your Account Manager and/or Sales Executive for details about modifying your plans to take advantage of these changes.


Prior Guidance: