IRS guidance, Notice 2020-29 and 2020-33, issued on May 12, 2020 addresses unanticipated changes in health and dependent care expenses because of the 2019 Novel Coronavirus (COVID-19) pandemic by providing for increased flexibility with respect to mid-year elections under a Section 125 cafeteria plan during calendar year 2020 related to employer sponsored health coverage, health Flexible Spending Arrangements (health FSAs), and dependent care assistance programs. It is also providing increased flexibility with respect to grace periods to apply unused amounts in health FSAs, and dependent care assistance programs incurred through December 31, 2020 and has increased the $500 limit for unused amounts remaining in a health FSA that may be carried over into the following year to $550.
Mid-year Elections Under a Section 125 Cafeteria Plan
For mid-year elections made during calendar year 2020, a Section 125 cafeteria plan may be amended to permit employees who are eligible to make salary reduction contributions under the plan 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.
An employer utilizing this relief is not required to provide unlimited election changes but may determine the extent to which such election changes are permitted and applied, provided that any permitted election changes are applied on a prospective basis only, and the changes to the plan’s election requirements do not result in failure to comply with the nondiscrimination rules applicable to cafeteria plans.
Extended Claims Period for Health FSAs and Dependent Care Assistance Programs
An employer may also amend its Section 125 cafeteria plan 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 ending in 2020 or a plan year ending in 2020 to pay or reimburse expenses incurred for the same qualified benefit through December 31, 2020. The guidance also increased the $500 limit for unused amounts remaining in a health FSA that may be carried over into the following year by making the carryover amount 20 percent of the maximum salary reduction amount under Section 125(i), which is indexed for inflation. For a plan year starting in 2020, the maximum unused amount allowed to be carried over to the immediately following plan year beginning in 2021 is $550 (20 percent of $2,750, the indexed 2020 limit under Section 125(i)).
An amendment for any of the above provisions for the 2020 plan year must be adopted on or before December 31, 2021, and may be effective retroactively to January 1, 2020, provided that the Section 125 cafeteria plan operates in accordance with Notice 2020-29 or Notice 2020-33 or both, as applicable, and the employer informs all employees eligible to participate in the Section 125 cafeteria plan of the changes to the plan.