IRS Issues Relaxed Cafeteria Plan Rules
To help cafeteria plan participants address challenges arising from the COVID-19 crisis, the Internal Revenue Service recently issued guidance allowing employers to make a number of participant-friendly changes under their cafeteria plans. While employer adoption of these more flexible rules is voluntary, plan sponsors should work with third-party administrators, insurance providers and legal advisors to ensure that the new provisions are properly adopted, documented and communicated.
In response to the Coronavirus (COVID-19) outbreak, on May 12, 2020, the Internal Revenue Service (IRS) issued Code Section 125 (cafeteria plan) guidance (see IRS Notice 2020-29 and Notice 2020-33) that allows employers to permit certain prospective midyear election changes under their cafeteria plans. Under the new guidance, employers may also allow participants to request reimbursements for certain claims incurred for eligible benefits through the end of the year 2020. Employer adoption of these more flexible rules is voluntary; however, if the employer elects to offer some or all of these new rules for the 2020 plan year, plan amendments must be adopted by December 31, 2021.
Additional IRS guidance issued this week increases the health flexible spending account (FSA) carryover amount from $500 to $550 for 2020 and relaxes rules regarding carryovers. This guidance also clarifies the ability of a health plan to reimburse insurance premiums incurred prior to the beginning of a plan year.
Change in Status Rules. Cafeteria plans may allow prospective mid-year election changes during calendar year 2020 in any of the following situations:
(1)New elections for employer-sponsored health coverage by employees who initially declined coverage
(2)Elections to enroll in different health coverage sponsored by the same employer (including a change from self-only to family coverage)
(3)Revocation of existing elections for employer-sponsored health coverage, with a written attestation that the employee is or immediately will be enrolled in other “comprehensive” health coverage not sponsored by the employer
(4)Health FSA or dependent care FSA (or dependent care assistance program; DCAP) election changes (including revocations, increases, decreases or new elections).
Sample attestation language is provided in IRS Notice 2020-29. Employers may rely on the employee’s written attestation unless the employer has actual knowledge that the employee is not or will not be enrolled in other comprehensive health coverage not sponsored by the employer. Employers will want to provide notice to employees of any modifications made to the plan under this guidance, most likely in the form of a Summary of Material Modifications (SMM). Adopting these permissive rules should help to reduce participant forfeitures under these plans in this difficult time but will create additional administration for plan administrators.
Health FSA and DCAP Claims. Cafeteria plans may be amended to permit employees to use amounts remaining in a health FSA or DCAP at the end of a plan year or grace period ending in 2020 to pay or reimburse qualified expenses incurred through December 31, 2020. This relief effectively acts as an extended grace period but applies both to plans that have a grace period and to health FSA plans that provide for a carryover of unused amounts. If the period for incurring claims is extended under a health FSA that is not HSA-compatible (such as a limited-purpose health FSA), an individual with unused amounts remaining at the end of a plan year or grace period ending in 2020 will not be eligible to contribute to an HSA during the extended period.
High-Deductible Health Plan (HDHP) Relief. Notice 2020-29 clarifies that recent relief allowing HDHPs to provide benefits for COVID-19 testing and treatment on a no- or low-deductible basis (see our On The Subject here) may apply retroactively to reimbursements of expenses incurred on or after January 1, 2020. The notice also clarifies that CARES Act relief regarding telehealth and other remote care services for plan years beginning on or before December 31, 2021 (see our On The Subject here) , applies with respect to services provided on or after January 1, 2020.
Health FSA Carryover Limit. Notice 2020-33 provides that the maximum carryover amount for health FSAs increased from $500 to $550 for a plan year beginning in 2020 to the plan year beginning in 2021. The carryover amount will be adjusted annually for inflation and is designed to be an amount equal to 20% of the maximum annual health FSA contribution amount. During 2020, the IRS will allow plans to permit all health FSA participants (not just those affected by COVID-19) to start or increase their health FSA contributions midyear for any reason, as described above, including to take advantage of the increased carryover limit.
Health Reimbursement Arrangement (HRA) Insurance Premiums. Expenses for health insurance premiums may be treated 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. Thus, a calendar-year individual coverage HRA (ICHRA) (see our On The Subject here) 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 before the first day of the plan year.
The recent guidance issued by the IRS reflects its recognition that plan participants may be struggling as a result of COVID-19, which was unexpected when participants originally made their plan elections, and gives employers an opportunity to give employees more choices. Plan sponsors and administrators should consult with their third-party administrators, insurance providers and legal advisors to confirm that any provisions they wish to adopt under this guidance is incorporated into existing plan policies, procedures, participant notices and applicable plan documents.