On May 12, 2020, the IRS issued Notice 2020-29 and Notice 2020-33 providing flexibility for cafeteria plans, flexible spending arrangements (FSAs), and high-deductible health plans (HDHPs) to aid in the national response to the COVID-19 public health emergency. In general, the Notices (1) provide cafeteria plans flexibility to allow mid-year election changes, (2) extend certain claims periods for FSAs, (3) increase the carryover limit for health FSAs from $500 to $550, and (4) clarify the effective date for certain changes to HDHPs. Below is a more detailed overview of the relief and clarifications provided under the Notices.
New Mid-Year Election Changes Allowed
Previously, cafeteria plan participants have been permitted to make mid-year election changes only in limited circumstances—often referred to as "life events"—such as a participant experiencing a change in employment or marital status, or a change in cost or coverage. Now, employers may amend their cafeteria plans to allow mid-year election changes in 2020, without the need for a life event, or a change in cost or coverage. Specifically, employers may amend their cafeteria plans to allow employees to:
- Enroll in the employer's health plan, if they were not previously enrolled;
- Change health plans, if the employer offers more than one health plan option;
- Disenroll from the employer's health plan, but only if the employee attests in writing that the employee is enrolled, or will immediately enroll, in comprehensive health coverage not sponsored by the employer;
- Begin making or cease making contributions to a health FSA or dependent care FSA; and
- Increase or decrease the amount of their contributions to a health FSA or dependent care FSA.
An employer can allow some, all, or none of these mid-year options. To implement any of these options, the employer must amend its cafeteria plan and communicate the option to all eligible employees.
Expanded Time Period for Incurring FSA Claims Allowed
Expanded Claims Period. Previously, health FSAs and dependent care FSAs have typically required amounts contributed during a plan year to be used for claims incurred during that same plan year. Now, an employer with a fiscal-year FSA may extend the claims period so that amounts contributed during the plan year ending in 2020 may be used for claims incurred through December 31, 2020.
Expanded Carryover Period. Previously, health FSAs have been permitted to have a "carryover" feature, where up to $500 contributed but unused in one plan year is carried over to the next plan year and may be used for claims incurred in that latter plan year. Now, an employer with a fiscal-year plan may extend the carryover feature so that amounts carried over into the plan year ending in 2020 may be used for claims incurred through December 31, 2020.
Expanded Grace Period. Generally, health FSAs and dependent care FSAs are permitted to have a "grace period" feature, where amounts contributed in one plan year could be used to reimburse not only claims incurred in that plan year but also claims incurred during the 2½ months following the end of the plan year. Now, employers may extend a grace period ending in 2020 so that it covers claims incurred through December 31, 2020.
All of these expanded periods for FSAs are optional. To implement any of these options, the employer must amend its cafeteria plan and communicate the option to all eligible employees.
Increased Carryover Amount for Health FSAs
As noted above, health FSAs were previously permitted to carry over a maximum of $500 from one plan year to the next. The IRS has increased the carryover limit for 2020 and has indexed the limit so that it may increase in the future. For plan years beginning in 2020, the increased carryover limit is $550.
The new limit is optional. Employers who wish to implement the new limit must adopt a plan amendment and communicate the change to eligible employees.
Retroactive Effective Date Permitted for Certain HDHP Benefits
As of March 18, 2020, HDHPs must cover coronavirus testing without any cost sharing. Earlier this year, the IRS announced that an HDHP could cover not only the coronavirus testing, but also coronavirus treatment and telehealth services, without any cost sharing, and without jeopardizing an enrollee's eligibility for a health savings account (HSA). (For more information, see our prior alert here.) Now, the IRS has indicated that all such coverage may be retroactive to January 1, 2020.
Providing coronavirus testing coverage prior to March 18 is optional. Providing coronavirus treatment coverage and telehealth services without cost sharing is optional, as is the effective date of that coverage. Employers that wish to provide more coverage can adopt a plan amendment (after consulting with the appropriate service providers!) and communicate the change to eligible employees.
If you have any questions regarding this client alert, or if you would like assistance with your organization's response to the COVID-19 national health emergency, please contact a member of Venable's Employee Benefits and Executive Compensation Practice Group.