COVID-19: New IRS Relief Allows Health Plan and Flexible Spending Account Election Changes
On May 12, 2020, the IRS issued guidance (IRS Notice 2020-19) to allow temporary changes to section 125 cafeteria plans. These plans allow participants to pay their portion of health insurance premiums and contribute to Health Law flexible spending accounts and dependent care assistance spending accounts (FSAs) on a pre-tax basis. In return for the tax-favored treatment, the IRS imposes strict prohibitions on a participant's ability to make changes once the plan year begins after open enrollment. Participants must estimate expenses they anticipate for the following year and make their elections accordingly.
COVID-19 has greatly impacted many individuals' Health Law and dependent care expenses, causing them to have over- or under-estimated expenses; for example, contributions to a heath FSA for anticipated elective surgery that is the shut-down, higher unanticipated child care expenses due to school and summer camp closings, etc. Most plans have a $500 carryover, but, if not, participants lose any unused balance at year-end.
The IRS guidance is intended to address unanticipated changes in expenses because of the COVID-19 pandemic, and it increases the $500 permitted carryover amount for health FSAs to $550 for 2020, with a direction to the Secretary of the Treasury to issue further guidance to increase the carryover.
Specifically, IRS Notice 2020-29 allows plan participants to make the following changes for the remainder of 2020:
- Make mid-year election changes for health coverage, allowing them to respond to changes in needs as a result of COVID-19. This includes changing from one plan option to another or switching coverage levels (single, family, employee + spouse, etc.).
- Make a new election for employer coverage if they initially declined coverage.
- Revoke an election, make a new election, or increase or decrease an existing election under health and dependent care FSAs.
Employers have discretion to allow all or any of these changes. They are not mandatory. For employers that allow them, plan amendments are not required until the end of 2021. Employers should contact their health plan administrative service providers to add these features and notify participants of the new options.