IRS Expands Mid-Year Change Opportunities for Health and FSA Benefits and Increases Carryover Limit
On May 12, 2020, the IRS released Notice 2020-29, which provides significant flexibility for health insurance and flexible spending account election changes during 2020, and Notice 2020-33, which increases the amount that may be carried over from one year to the next under a health flexible spending account (FSA). The guidance allows increased flexibility for employees to make or change their elections for calendar year 2020, as well as more time for employees to spend down health and dependent care FSA balances. These changes are optional and would require plan amendments.
Read below for more details about this relief, including the deadline to make plan amendments.
Mid-Year Election Changes (2020 Only)
Cafeteria plans permit employees to choose to pay for health and certain other benefits on a pre-tax basis. In general, elections must be made before the plan year starts, and mid-year changes are permitted only if there is a qualifying change in status (such as an employment change, getting married, having a baby, or moving) or a qualifying change to the benefit.
In recognition of the challenges that individuals are facing as a result of the coronavirus pandemic, some employers have permitted employees to change their health coverage mid-year—for example, to elect coverage if they had previously declined it. Absent relief, these circumstances would not necessarily be sufficient to allow a mid-year change. Notice 2020-29 makes an exception for the rest of 2020, if the plan is amended to allow the change and the change applies prospectively. Subject to those conditions, the following changes are permitted for the rest of 2020:
- Employer-sponsored health coverage: Employees who previously declined employer-provided health coverage may elect coverage on a prospective basis. In addition, employees who previously elected coverage may drop that coverage mid-year in conjunction with enrolling in different health coverage from the same employer or enrolling in other health coverage. An attestation is required if the employee is enrolling in outside health coverage.
- Health and Dependent Care FSAs: Employees may make a new election, or increase or decrease an existing election, for the rest of 2020. This relief applies for general purpose and limited purpose health FSAs, as well as for dependent care FSAs.
Employers have significant discretion in applying this relief. For example, an employer may limit the types of elections that are permitted in order to mitigate adverse selection. Also, for employers that have already loosened the election change rules, the relief applies retroactively for changes made on or after January 1, 2020.
Increase to Health FSA Carryover Limit (Permanent Change)
In general, flexible spending accounts are subject to a “use it or lose it” rule: balances must be used for eligible expenses incurred during the plan year and unused balances are subject to forfeiture. There are two exceptions to this rule for health FSAs:
- A health FSA may cover eligible expenses that are incurred during a limited “grace period” (up to two months and 15 days after the end of the plan year).
- A health FSA may allow employees to “carry over” up to $500 to be used for expenses incurred in the next plan year.
These exceptions are mutually exclusive: a health FSA may allow a grace period or a carryover, but not both.
Carryover Limit is Increased. Effective for plan years starting on and after January 1, 2020, Notice 2020-33 increases the $500 carryover limit for health FSAs to 20% of the annual salary reduction contribution limit. This means that the limit is increasing to $550 for 2020 (20% of the $2,750 limit on salary reduction contributions). Future adjustments will be in $10 increments. If permitted by the employer’s plan, employees may change their elections for the remainder of 2020 to account for this increase.
Special Relief for Non-Calendar Year Plans and Plans With Grace Periods (2020 Only)
Notice 2020-29 also includes special relief for plans under which the deadline to incur expenses ends during 2020 (before December 31st)—whether due to a grace period that ends during 2020 or a non-calendar plan year that ends during 2020. Under this relief, a plan may extend the deadline to incur expenses to December 31, 2020. For example, if the grace period for incurring claims under a health FSA ended on March 15, 2020, the plan may be amended to allow remaining balances to be used for eligible health expenses incurred later in calendar year 2020. Similarly, if the plan year for a flexible spending account (health or dependent care) ends on June 30, 2020, the plan may be amended to allow the FSAs to be used for eligible expenses incurred later in calendar year 2020.
Again, these changes are optional, and they are not all or nothing. Employers may choose which relief to make available (if any).
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Plan sponsors that wish to make changes for 2020 should communicate the changes to affected employees in time to be useful and must adopt conforming plan amendments no later than December 31, 2021.