IRS Guidance and Relief for Cafeteria Plans and other Account-based Plans

IRS Guidance and Relief for Cafeteria Plans and other Account-based Plans

An employee looking at accounting documents.

For future reference, the contents of this supplement will be incorporated into the Cafeteria Plan discussion contained in our CBIZ Employer Compliance Handbook: COVID-19's Impact on Benefits and Employment.

 

On May 12, 2020, the IRS and Treasury issued much anticipated guidance applicable to IRC Section 125 cafeteria plans, and spending account-based plans such as medical flexible spending account (health FSA) plans, dependent care assistance plans (DCAP), individual coverage health reimbursement arrangements (HRA), and addresses telehealth services under health savings accounts (HSA).  Following is a summary of this guidance (IRS Notice 2020-29 and IRS Notice 2020-33).

Mid-Year Election Changes

Due to challenges arising out of the coronavirus situation, there has been much need for relief as it relates to voluntary special enrollment opportunities being offered by insurers and health plans, as well as permissible status change events due to change in circumstances.  As a reminder, an IRC Section 125 cafeteria plan requires that an election be binding for 12 months.  An election can only be changed when certain status change events occur, as specified in the plan.

The relief provided in IRS Notice 2020-29 offers the following temporary status change opportunities:

  • With regard to insured and self-funded employer-sponsored group health coverage, a cafeteria plan may be designed to allow individuals to:
    1. Elect previously declined health coverage on a prospective basis;
    2. Revoke an existing election and make a new election to enroll in different health coverage, or change the type of coverage such as changing from single to family coverage, that is sponsored by the same employer on a prospective basis; or
    3. Revoke an existing election of health coverage on a prospective basis, provided that the employee attests in writing that he/she is enrolled, or will immediately enroll, in other health coverage not sponsored by the employer.  The IRS Notice provides the following sample language for such written attestation:

 Name:  _________________ (and other identifying information requested by the employer for administrative purposes).

I attest that I am enrolled in, or immediately will enroll in, one of the following types of coverage: (1) employer-sponsored health coverage through the employer of my spouse or parent; (2) individual health insurance coverage enrolled in through the Health Insurance Marketplace (also known as the Health Insurance Exchange); (3) Medicaid; (4) Medicare; (5) TRICARE; (6) Civilian Health and Medical Program of the Department of Veterans Affairs (CHAMPVA); or (7) other coverage that provides comprehensive health benefits (for example, health insurance purchased directly from an insurance company or health insurance provided through a student health plan).

Signature:                                                              

  • A health FSA plan, including a limited purpose HSA-compatible FSA plan and/or a dependent care assistance plan (DCAP) may be designed to allow participants to revoke their elections, make a new election, or decrease or increase an existing election on a prospective basis. 

These changes to the mid-year election rules is a significant departure from the traditionally strict requirements applicable to these types of plans. These modifications are intended to assist employees in balancing their changing needs, which could be a result from an increased need for medical care, a change in dependent care provider needs, or as a result of an inability to get care due to limitation on elective procedures.

Extended Claims Periods for Health FSAs and DCAPs

For unused amounts remaining in a health FSA or a dependent care assistance program as of the end of a grace period, for plan years ending in 2020, the plan may permit employees to apply those unused amounts to pay or reimburse medical care expenses or dependent care expenses, respectively, incurred through December 31, 2020.  This change would effectively apply to grace periods ending in 2020, for example, a 2019 calendar year grace period, as well as for plan years ending in 2020.  For example, if a calendar year health FSA plan provides a grace period ending on March 15 immediately following the end of each plan year, the plan may be amended to allow individuals to apply unused amounts remaining in their health FSA as of March 15, 2020 to reimburse medical care expenses incurred through December 31, 2020.                                    

Plan Amendments

According to this guidance, a plan could be amended to allow any of these election changes or extended claim periods to be made anytime during calendar year 2020. If one or more of these changes are elected by the employer/plan sponsor, the relevant plan must be amended to provide for the change(s).  An amendment for the 2020 plan year must be adopted on or before December 31, 2021, and may be made effective retroactively to January 1, 2020.   Individuals eligible to participate in the relevant plan must be notified of the change(s).  Note, the plan must be administered with the intended change even if the plan is not amended until a later date.

The IRS makes clear that employers are not required to provide unlimited election changes but may, in their sole discretion, determine which permitted changes to allow under their plans.  Further, the IRS cautions employers to be aware of the potential impact on the IRC Section 125 discrimination rules, and potential impact for adverse selection of health coverage by employees resulting from these broadened election change opportunities.  Changes to a plan could also trigger other plan sponsor notice obligations under ERISA such as a summary of material modification or a revised summary plan description.

FSA Carryover

Current law permits up to a $500 carryover of unused amounts remaining as of the end of a health FSA plan year to be carried over to pay or reimburse a participant for medical care expenses incurred during the following plan year.  By way of IRS Notice 2020-33, the amount of carryover is increased from $500 to $550.  The change in carryover amount is now tied to a cost of living adjustment and is based on 20% of the FSA salary reduction limit, currently $2,750 for 2020.  This indexing tie is a permanent change in the law.

Generally, an FSA plan can be amended any time prior to the end of the plan year for which a carry forward will be permitted, as long as the plan is administered in accordance with the intent to allow the carry over for the entire plan year.  For the 2020 plan year and because plans can allow FSA election modifications, the carryover feature can be adopted as long as the amendment is accomplished on or before December 31, 2021. 

An individual who would like to increase his/her health FSA contributions, or begin to make health FSA contributions, as a result of the increased carryover amount may do so in accordance with the mid-year election changes described above.   However, only future salary may be reduced under the revised election; amounts contributed to the health FSA after the revised election may be used for any medical care expense incurred during the first plan year that begins on or after January 1, 2020.

Reimbursement of premium - Individual Coverage HRAs (IC-HRA)

Under current rules, health plans, including Section 125 premium reimbursement plans, or an individual coverage health reimbursement arrangement (IC-HRA), cannot reimburse medical care expenses incurred prior to the beginning of the plan year in order to qualify for income tax exclusion.  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.  

IRS Notice 2020-33 modifies these rules such that a plan is permitted to treat an expense for a premium for health insurance coverage as incurred on:

  1. The first day of each month of coverage on a pro rata basis;
  2. The first day of the period of coverage; or
  3. The date the premium is paid.

For example, an individual coverage HRA 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 the first day of the plan year.

Telehealth Services - HSAs

Prior IRS guidance issued on March 11, 2020 (IRS Notice 2020-15) included a safe harbor relating to HSA eligibility if an HSA-compatibility high deductible health plan covers in full, or in part, the cost for testing and treatment of the coronavirus.  The CARES Act broadened this provision to make it applicable for all telemedicine services received by HSA participants, not just those limited to coronavirus testing for plan years beginning on or before December 31, 2021.  The newly issued IRS Notice 2020-29 makes the HSA-telehealth service rules applicable retroactively to January 1, 2020.  For example, if an otherwise eligible individual covered under an HDHP received telehealth or other remote care services under an HDHP on February 15, 2020, prior to satisfying the HDHP deductible, then he/she would not be disqualified from contributing to an HSA during 2020.  This guidance also provides for first dollar coverage for ancillary testing prescribed by a provider in conjunction with coronavirus.

Next Steps

  • Determine which, if any, of these changes will be allowed by your plan(s). 
  • Determine, in consultation with third party providers, processes to accomplish these changes.  By way of example, only allow a voluntary special enrollment opportunity if the plan and the insurer, and stop loss insurer as applicable, likewise allow it.
  • Once a decision has been made to amend the plan, the change(s) must be communicated to participants.

IRS Guidance and Relief for Cafeteria Plans and other Account-based Plans~/Portals/0/PackFlashItemImages/WebReady/IRS Guidance and Relief for Cafeteria Plans and other Account-based Plans.jpghttps://www.cbiz.com/Portals/0/liquidImages/WebReady/IRS Guidance and Relief for Cafeteria Plans and other Account-based Plans.jpgOn May 12, 2020, the IRS and Treasury issued much anticipated guidance applicable to IRC Section 125 cafeteria plans, and spending account-based plans. Here is a summary of this guidance (IRS Notice 2020-29 and IRS Notice 2020-33)....2020-05-13T18:28:03-05:00

On May 12, 2020, the IRS and Treasury issued much anticipated guidance applicable to IRC Section 125 cafeteria plans, and spending account-based plans. Here is a summary of this guidance (IRS Notice 2020-29 and IRS Notice 2020-33).

Planning & Tax MinimizationFederal Tax