IRS Guidance Provides Employers with the Ability to Offer a Second Open Enrollment Period for the 2020 Plan Year and Provides Greater Flexibility for Making Mid-Year Cafeteria Plan Elections (US)
Providing much needed assistance to employees’ who were blindsided by COVID-19 and who were incapable of making health care coverage elections with COVID-19 in mind, the IRS on May 12, 2020, provided temporary relief that allows employers, during 2020, to expand the permissible reasons for employees to make prospective mid-year election changes to their health care coverage, and contributions to health flexible spending accounts (FSA) and dependent care assistance programs (DCAP), beyond what is currently permitted under the law.
Additionally, in separate guidance, beginning in the 2021, the IRS increased the maximum health FSA year-end carryover amount from $500 to $550 relating to any unused health FSA balance remaining at the end of a plan year.
Section 125 of the Internal Revenue Code (Code) permits employers to offer a “cafeteria plan” to provide employees with the ability to pay their employee contributions for health care coverage, and contribute to health FSAs and DCAPs, on a pre-tax basis. In general, Code Section 125 mandates that elections made under the plan be irrevocable for an entire plan year. However, a plan may be designed to allow employees to make mid-year election changes, if certain criteria are met.
In general, changes under cafeteria plans are permitted for various kinds of life events, and if there are significant changes in the health coverage being offered under the employer’s health plan. The permissible criteria for allowing mid-year changes must be enumerated in a written plan document and communicated to employees. In addition, an employer with an insured health care plan, or a self-insured plan with stop-loss coverage, must ensure that the relevant insurance policies also permit employees to make mid-year changes in coverage, as may be permitted under the cafeteria plan rules.
New Prospective Permissible Mid-year Cafeteria Plan Elections
IRS Notice 2020-29 provides that an employer may amend its cafeteria plan to allow an employee to make all or any one of the following changes on a prospective basis only:
to make a new election for employer-sponsored health coverage, if the employee initially declined to elect employer-sponsored health coverage;
to 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 (this includes changing enrollment from self-only coverage to family coverage);
to revoke an existing election for employer-sponsored health coverage, 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;
to revoke an existing election, make a new election, or decrease or increase an existing election regarding a health FSA on a prospective basis; or
to revoke an existing election, make a new election, or decrease or increase an existing election regarding a dependent care assistance program on a prospective basis.
Two practical items to note with respect to these relief measures. First, none of these permissible election changes are mandatory. Employers may adopt one or all of the election changes. Second, employers most likely are vaguely aware that some of these may look or feel familiar; however, the ability for an employee to change FSA and DCAP elections was never available under current law. As such, may provide a tremendous amount of assistance to employees during 2020.
Employers may not accept an employee’s complete revocation of coverage unless it receives an employee’s attestation that is enrolled in coverage sponsored by another employer. The employer is permitted to rely on such attestation unless it has knowledge that the employee is not enrolled in other employer-sponsored health coverage. The Notice provides a sample attestation that employers can use – employees would sign the attestation when revoking an existing election, stating that they will enroll in different health coverage.
Cafeteria Plan Amendments
In order for employers and their employees to utilize these new cafeteria plan provisions, employers must amend their cafeteria plans on or before December 31, 2021. Moreover, such amendments may be made retroactive to January 1, 2020.
Extended Grace Periods for incurring Claims under Health FSAs & DCAPs
The Notice also permits a cafeteria plan to be amended to provide employees with an extended grace period in 2020 to apply their unused health FSA or DCAP amounts remaining from a prior year. Unused amounts from a prior year may be used to pay for any expenses incurred during the remainder of the 2020 calendar year.
For example, assume an employer sponsors a calendar year cafeteria plan with a health FSA that provides for a grace period ending on March 15, 2020. The employer may amend its cafeteria plan to permit employees to apply any unused health FSA amounts remaining as of March 15, 2020, to pay for an employee’s medical care expenses incurred through December 31, 2020.
Increase in Health FSA Carryover Limit
Code § 125(i) provides that, a health FSA must limit each employee’s salary reduction contribution to the health FSA to no more than $2,500 per taxable year (as indexed for cost-of-living adjustments, $2,750 for 2020). Proposed regulations under § 125 generally prohibit participants from using contributions made for one plan year to purchase a benefit that will be provided in a subsequent plan year. Thus, in general, there is a “use-it or lose-it” rule.
Nevertheless, current IRS rules do allow a cafeteria plan to have a 2-1/2 month grace period for employees to use up unused amounts after the plan year ends. Alternatively, the cafeteria plan can permit a small carryover allowance of up to $500 from one plan year to the next.
IRS Notice 2020-33 increases the maximum $500 carryover limit in a plan year to an amount that is 20% of the maximum salary reduction contribution for the plan year. That equates to $550 for a plan year beginning in 2020 (20% of $2,750). Thus, up to $550 maybe carried over to a plan year beginning in 2021.
High Deductible Health Plan (HDHP) & COVID-19 Expenses
As you may recall, the IRS adopted a rule, in Notice 2020-15, that HDHPs will not fail if an employer health care plan provides COVID-19 related testing and medical treatment before the HDHP minimum deductible is satisfied. In Notice 2020-29, the IRS further clarified that the relief granted in 2020-15 is for reimbursements commencing on or after January 1, 2020.
In addition, the Notice further clarified for employers that diagnostic testing for influenza A&B, norovirus and other coronaviruses, and respiratory syncytial virus (RSV) are services required to be covered with zero cost sharing under the Families First Coronavirus Response Act (FFCRA), and as amended by the CARES Act.
High Deductible Health Plan & Telehealth
The CARES Act provided a temporary safe harbor for HDHPs that provided coverage for telehealth and other remote health care services without a deductible or with a deductible below the permissible deductible under certain Health Savings Account (HSA) rules. As such, an otherwise eligible individual with coverage under an HDHP may also receive coverage for telehealth and other remote health care services outside the HDHP and before satisfying an HDHP deductible. This safe harbor is effective beginning March 27, 2010 and applies to plan years beginning on or before December 31, 2021.
Notice 2020-29 highlights that this provision under the CARES Act applies with respect to services provided on or after January 1, 2020. Thus, if an otherwise eligible individual with coverage under an HDHP received coverage prior to March 27, 2020 for telehealth and other remote health care services, and before satisfying his or her HDHP deductible, they will not be disqualified from contributing to an HSA during 2020.