IRS Loosens Cafeteria Plan Rules for 2020; Allows Midyear Changes

In connection with its continued response to the coronavirus pandemic, the Internal Revenue Service, in Notice 2020-29 (found here), provided increased flexibility for cafeteria plan election changes and flexible spending account grace periods. Notably, while the relief in Notice 2020-29 is in response to the coronavirus pandemic, the relief is unqualified; employees need not demonstrate a specific pandemic-related need in order to avail themselves of the election changes and other relief.

Employers must amend their cafeteria plans in order to utilize the relief provided in Notice 2020-29. The amendments must be adopted by Dec. 31, 2021, and may be retroactive to Jan. 1, 2020, provided that the applicable plan is operated in accordance with the Notice and the employer advises employees of the changes to the plan.

Midyear Election Changes

Cafeteria plan elections are generally irrevocable and must be made before the first day of the plan year, except for midyear changes permitted under Treas. Reg. § 1.125-4 to reflect specific occurrences, such as a change in status or special enrollment period.

Notice 2020-29 allows for prospective midyear elections in 2020, as follows:

• For employer-sponsored health coverage, employees may: (i) elect coverage, if the employee previously declined coverage; (ii) revoke existing coverage and elect different coverage sponsored by the same employer, such as a different option offered by the employer or changing from individual to family coverage; and (iii) revoke coverage without electing other coverage sponsored by the same employer, 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. The employer may rely on the attestation unless the employer has knowledge otherwise. Notice 2020-29 includes a sample acceptable written attestation.
  
  

  These changes apply to both self-insured plans and insured plans.

• For health care flexible spending accounts (including limited-purpose health FSAs compatible with the HSAs) and dependent care flexible spending accounts: revoke an election, make a new election, or increase or decrease the amount previously elected.

These election changes can be made regardless of whether the criteria set forth in Treas. Reg. § 1.125-4 are met. Employers are not required to allow these changes and may amend one or more of their cafeteria plans to take advantage of these additional election provisions. Further, employers need not make the right to election changes unlimited; for example, employers may provide that the election changes must be made during a limited window. Employers should, however, make sure the changes do not result in failure to comply with any nondiscrimination rules under their plans.

Extended Claims Period for Health Care FSAs and Dependent Care FSAs

A cafeteria plan generally may permit unused amounts contributed to health care or dependent care FSA to be used for expenses incurred during a grace period up to two months and 15 days into the following plan year. Notice 2020-29 allows unused amounts from plan years or grace periods ending in 2020 to be used through Dec. 31, 2020. For example, a calendar year FSA that permitted 2019 unused amounts to be used through March 15, 2020, now can permit those amounts to be used for expenses incurred through Dec. 31, 2020.

A cafeteria plan generally may permit up to $500 of unused contributions to a health care FSA to be carried over to the following plan year. Although a plan generally may not provide for both the grace period and a carryover, Notice 2020-29 permits the 2020 extended grace period even for plans that permit the carryover.

Separately, the IRS (in Notice 2020-33, here) increased the carryover amount to $550 beginning with carryovers from plan years starting in 2020. The plan amendment to accomplish the increase to $550 also must be adopted by Dec. 31, 2021, and may be retroactive to Jan. 1, 2020, provided that the applicable plan is operated in accordance with Notice 2020-33 and the employer advises employees of the changes to the plan.

Next Steps

This relief will assist employees who wish to revoke or revise cafeteria plans and FSA elections to reflect unexpected changes to medical expenses and dependent care expenses. Before making any changes, we recommend that plan sponsors discuss the proposed changes with their legal counsel as well as third party administrators, insurance providers and insurance brokers, to the extent applicable.