New COVID-19 Guidance for Section 125 Mid-year Election Change Rules
On May 12, 2020, the IRS released Notice 2020-29, which provides temporary flexibility for mid-year election changes under a Section 125 cafeteria plan during calendar year 2020. The changes are designed to allow employers to respond to changes in employee needs as a result of the COVID-19 pandemic. This guidance relates to mid-year elections for self-insured and fully insured employer-sponsored health coverage, health flexible spending arrangements (health FSAs) and dependent care assistance programs (DCAPs).
Permitted Election Changes
For employer-sponsored health coverage, a Section 125 cafeteria plan may permit an employee to prospectively:
- Make a new election if the employee previously declined coverage;
- Revoke an existing election and enroll in different health coverage sponsored by the employer; or
- Revoke an existing election, if the employee is or will be enrolled in other health coverage.
Employees may also prospectively revoke an election, make a new election or decrease or increase an existing election for a health FSA or DCAP. A plan may permit any of the election changes described in the notice, regardless of whether they satisfy existing mid-year election change rules.
These permitted election changes are available at an employer’s discretion — they are not required. Further, employers will need to check with their particular insurance or stop-loss carrier to confirm that they will also allow these changes to be made mid-year. If an employer wishes to allow these changes, the employer must adopt a plan amendment by Dec. 31, 2021, and inform employees of the change. The amendment may be retroactive to Jan. 1, 2020. Changes to the plan may also implicate other applicable laws, such as participant notification requirements under ERISA.
IRS Provides More Options for Unused Funds in Health FSAs and DCAPs
In addition to the guidance above, the IRS announced more options with respect to unused amounts in health FSAs and DCAPs. These options allow employers to permit:
- An extended period for incurring health FSA or DCAP expenses; or
(Due to the COVID-19 outbreak, employees may be more likely to have unused amounts in their health FSAs or DCAPs. IRS Notice 2020-29 allows employers to permit employees to apply unused amounts remaining in a health FSA or a DCAP at the end of a plan year ending in 2020 (or a grace period ending in 2020) to pay or reimburse expenses incurred through Dec. 31, 2020. This relief applies to all health FSAs, including health FSAs that allow carryovers.)
- An increase in the annual carryover amount to $550.
(IRS Notice 2020-33 increases the health FSA carryover limit for unused funds remaining at the end of a plan year from $500 to $550 to reflect indexing for inflation. This change is effective for plan years beginning in 2020 and reflects the maximum amount that may be carried over to the immediately following plan year beginning in 2021.)
As with the mid-year election changes, these options are available at an employer’s discretion — they are not required. Please note that none of these changes allow an employer to refund FSA or DCAP contributions that have already been made this year, but not yet spent. If an employer wishes to allow these changes, the employer must adopt a plan amendment by Dec. 31, 2021, and inform employees of the change.
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