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May 22, 2020

Benefits Advisor Perspective on Mid-Year IRS Relief – Cafeteria Plan and FSA Considerations

Recently, the IRS issued broad regulatory relief for Cafeteria Plans (aka Section 125 Plans) and Flexible Spending Account Plans (FSAs). Sources:

In short, this relief offers the option of running full, partial, or very limited mid-year open enrollments on employer-sponsored group health coverage flowing through the employer’s Section 125 Plan, as well for FSA plans. Further, additional relief is available to FSAs currently offering the special 2.5-month grace period provision, and permanent minor enhancements are available to healthcare FSAs offering the $500 rollover feature.

Complicating matters, the guidance:

  • Is not clear if it also pertains to dental and vision benefits flowing through a Section 125 plan.
  • Offers tremendous flexibility to employers in picking and choosing which relief provisions to implement and when to implement them.
  • Does not suspend the existing cafeteria plan nondiscrimination rules and testing requirements.
  • Does not compel insurers, third-party administrators (TPAs), and/or stop loss insurers from ultimately agreeing to any of the employer’s desired amendments! No kidding.

In short, certain employers have much to consider and navigate. Meanwhile, other employers have little to consider. Thus, we designed the below decision tree as a supplement to the above cited sources to assist you in making informed decisions as efficiently as possible. We hope you find it helpful. Please keep in mind that all of these changes are optional.

  1. Would you like to, in short, host a 2020 mid-year special open enrollment for medical, dental, and vision?
    1. If no, no action is needed.
    2. If yes:
      1. For which benefits, if any? Tip – Consider the impact of deductibles and other plan provisions resetting mid-year! Tip – Consider the Health Savings Account (HSA) implications.
      2. For which effective date? What will the election window be?
      3. Do you want to permit all below normative open enrollment changes or just some?
        1. Those waving coverage may now join the plan.
        2. Those enrolled may now choose a new plan or new enrollment tier. (This option may be further refined to only allow for new elections that “improve” existing coverage.)
        3. Those enrolled may now drop the plan. Under this option, the employee must attest in writing that he or she is enrolled, or will immediately enroll, in other health coverage not sponsored by the employer. (There’s sample attestation language in the IRS notice.)
      4. Do any of these desired provisions pose cafeteria plan nondiscrimination testing challenges?
      5. Next, take the above 1.b.i, 1.b.ii, 1.b.iii preferences and ask your applicable vendors if they are willing to amend the terms of your documents and contracts to permit these changes. Of note, the IRS Notice does not compel your vendors to agree to any of this! Vendors to consult, as applicable:
        1. Fully insured medical, dental, vision
        2. Self-funded TPAs for medical, dental, vision
        3. Stop loss insurers
    3. If your 1.b. outline is implemented, amend:
      1. All vendor documents, certificates, and policies
      2. Section 125 documents
      3. Wrap documents, as applicable

 

  1. Would you like to host a mid-year open enrollment for the FSA?
    1. If no, no action is needed.
      1. For the medical FSA, an open enrollment may be convenient for individuals who set aside dollars for elective procedures that were postponed and that may not be rescheduled before the end of the FSA plan year.
      2. For the dependent care FSA, most FSA plan documents already allow the participant to revoke or change his or her election if, for example, the daycare facility or day camp closes. (That’s technically a “price change.”)
    2. If yes:
      1. For both the healthcare FSA and the dependent care FSA? 
      2. For which effective date? And, what will the election window be?
      3. Do you want to permit all below normative open enrollment changes or just some?
        1. Those waving coverage may now join the plan.
        2. Those enrolled may increase or decrease their elections.
        3. Those enrolled may now drop the plan.
      4. Specific to current enrollees in overspent positions, do you prefer to limit the changes these individuals can make?
      5. Do any of these desired provisions pose cafeteria plan nondiscrimination testing challenges?
      6. Can your FSA TPA accommodate your above outline (be especially from Missouri on 2.b.iv)? If yes, implement the changes and amend the FSA related documents.

 

  1. Are any decisions needed regarding the FSA 2.5-month grace period?
    1. Do you sponsor an FSA with the special 2.5-month grace period? Note that this provision could apply to the healthcare FSA, the dependent care FSA, or to both. Under this provision, individuals can incur claims during the 2.5 months immediately following the plan year end date and claim those expenses back against the previous plan year. Tip – If you’ve never heard of this provision, you probably don’t have it. Tip – If you have the $500 rollover provision on your healthcare FSA, you don’t have this grace period on your healthcare FSA. (You can’t have both under IRS rules.) If you’re not sure, check your FSA plan document.
    2. If no, no action is needed.
    3. If yes:
      1. Would you prefer to extend your grace period that would normally end before Dec. 31, 2020 all the way to Dec. 31, 2020? For example, a 2019 calendar year FSA’s grace period ended March 15, 2020. This employer could retroactively extend the grace period for the January 2019 plan year to Dec. 30, 2020. Or, for example, an FSA plan year beginning July 1, 2019 will have a grace period end date of Sept. 15, 2020. This employer could also retroactively extend the grace period for the July 2019 plan year to Dec, 31. 2020. Thoughts on this decision:
        1. If your grace period has already ended, pull reporting to see how many had “lost” balances. If few did, consider not making this change.
        2. If your grace period has not yet ended, consider waiting until it has ended to make this decision.
        3. Consider if extending this grace period would inadvertently disqualify the HSAs of certain medical plan enrollees (these rules are complicated – be careful).
      2. If no, no action is needed.
      3. If yes, ensure that your FSA TPA can accommodate this change and amend your documents accordingly.

 

  1. Are any decisions needed regarding the healthcare FSA $500 rollover provision?
    1. Do you sponsor an FSA with the special $500 rollover provision? Note that this provision cannot apply to the dependent care FSA. Tip – If you’ve never heard of this provision, you probably don’t have it. Tip – If your healthcare FSA has the above described 2.5-month grace period, you don’t have the $500 rollover. (You can’t have both under IRS rules.)
    2. If no, no action is needed.
    3. If yes: For your healthcare FSA, would you like to amend your FSA plan year that began or will begin in 2020 to increase the rollover from $500 to $550?
      1. If no, no action is needed.
      2. If yes, ensure that your FSA TPA can accommodate this change and amend your documents accordingly.

Good luck in your evaluation and implementation process! Please note that as convoluted as the above decision tree is, it only addresses some of the more common considerations. And, please remember that saying “no” to all these changes is permitted. Naturally, it is recommended that you seek the advice and counsel of your attorney, accountant, benefits consultant, and other advisors before making final decisions.

Zack Pace, SVP | zpace@cbiz.com | LinkedIn

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