IRS Releases Cafeteria Plan Relief

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On Tuesday, May 12th, the IRS released a pair of notices that affect cafeteria plans and flexible spending accounts (FSAs). These notices give employers the opportunity to add extended grace periods to FSAs, increase the maximum rollover amount on Health Care FSAs, and/or allow their participants to make mid-year cafeteria plan election changes if their needs change during the pandemic.

To take advantage of any of these options, plan sponsors must amend their cafeteria plans.

IRS Notice 2020-29 – Temporary Relief

If an Employer chooses to amend their plan for any of these changes, they can do so retroactively to the beginning of 1/1/2020 and must provide notice to participants of the changes.

Mid-Year Election Changes:

Employers can amend their cafeteria plans (the BESTflex Plan) to allow participants to, during the 2020 calendar year:

  • Pay pre-tax for new employer-sponsored health coverage, if the employee initially declined to elect employer-sponsored health coverage
  • Change pre-tax election for existing employer-sponsored health coverage change to different health coverage sponsored by the same employer
  • Drop their pre-tax election for employer-sponsored health coverage, if the employee attests in writing that they are enrolled, or immediately will enroll, in other health coverage not sponsored by the employer
  • Revoke an election, make a new election, or change an existing election for a Health Care or Dependent Care FSA

Retroactive amendments do not change the rule that permitted election changes be made prospectively as of the as of the date of the request or the event, whichever is later (except for birth or adoption change events for non-excepted Health Care FSAs and health plans). Participants who increase their FSA election will only be able to access the increased election amount for expenses incurred after the effective date of their change event.

Grace Period Extension and Availability:

Employers can amend their cafeteria plans as follows:

  • If a plan has Health Care FSA plan year that ended or ends in the calendar year 2020, allow participants to use amounts remaining at the end of the plan year to pay or reimburse medical expenses incurred through December 31, 2020
  • If a plan has Health Care FSA grace period that ended or ends in the calendar year 2020, allow participants to use amounts remaining at the end of the grace period to pay or reimburse medical expenses incurred through December 31, 2020
  • If a plan has Dependent Care FSA plan year that ended or ends in the calendar year 2020, allow participants to use amounts remaining at the end of the plan year to pay or reimburse dependent care expenses incurred through December 31, 2020
  • If a plan has Dependent Care FSA grace period that ended or ends in the calendar year 2020, allow participants to use amounts remaining at the end of the grace period to pay or reimburse dependent care expenses incurred through December 31, 2020

Which plans can take advantage of adding an extended grace period?

See the following examples:

  • Cafeteria plan ends 12/31/2019 (plan did not have grace period) – Extended grace period is not available
  • Cafeteria plan ends 12/31/2019 and had grace period through 3/15/2020 – The employer can extend the grace period to run through 12/31/2020
  • Cafeteria plan ends 1/31/2020 (plan did not have grace period) – The employer can amend their plan as of 1/1/2020 to extend a grace period through 12/31/2020

HSA Related Updates:

IRS Notice 2020-29 also clarifies that earlier guidance allowing telehealth services and certain COVID-19 related testing and treatment below the statutory HDHP deductible extends back to 1/1/2020.

IRS Notice 2020-33 – Permanent Change

This notice increases statutory Health Care FSA rollover limits to $550 for 2020 and indexes the rollover amount to inflation going forward (in $10 increments). The limit increase is effective for plan years beginning 1/1/2020 or later, as long as the plan incorporates statutory limits by reference or is amended to take advantage of the limits prior to the end of the plan year

The notice also clarifies timing of insurance reimbursements for Individual Coverage Health Reimbursement Arrangements (ICHRAs).

Categories: Benefits in General, Compliance | Tags: IRS Notice 2020-29 , IRS Notice 2020-33 , Permitted Election Changes , Cafeteria Plans , Health Care FSA , Dependent Care FSA , Grace Period , Rollover , Amendments | Return