IRS Issues Relief for Cafeteria Plans

Introduction

The IRS released guidance to allow changes to section 125 cafeteria plans. These changes allow taxpayers to make mid-year changes for health coverage, health FSAs and dependent care FSA and extend the claims period for health FSAs and dependent care FSAs. The guidance also increases for inflation the $500 permitted carryover amount for health FSAs to $550. Adopting the relief by a plan is optional.

Plans adopting any of these changes will have until December 31, 2021 to amend their written plan documents and must notify all eligible employees of the changes to the plan. Changes will be retroactively effective to January 1, 2020. The guidance does not provide a due date for the employee notice, but best practice would be to communicate the changes soon so that employees may take advantage of the relief.

Mid-Year Election Changes under a Section 125 Cafeteria Plan

Notice 2020-29 allows a plan to temporarily permit employees to make certain prospective mid-year election changes for employer-sponsored health coverage, health FSAs, and dependent care FSAs during calendar year 2020. Specifically, an employer may amend its § 125 cafeteria plans to allow eligible employees to:

• make a new election for employer-sponsored health coverage on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage;
• revoke an existing election for employer-sponsored health coverage and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis (including changing enrollment from self-only coverage to family coverage);
• revoke an existing election for employer-sponsored health coverage on a prospective basis, 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;
• revoke an election, make a new election, or decrease or increase an existing election regarding a health FSA on a prospective basis; and
• revoke an election, make a new election, or decrease or increase an existing election regarding a dependent care assistance program on a prospective basis.

For group health coverage, if an employee revokes an election, they have to provide written attestation that they are enrolling in other coverage.  An employer can accept the employee’s attestation unless the employer has actual knowledge they will not be enrolling in other coverage. A sample attestation is provided in the Notice.

Use of Remaining FSA Funds

For health FSA or dependent care FSAs with a grace period or plan year that ends in 2020, Notice 2020-29 also permits an employer to amend its cafeteria plan to allow participants to use funds remaining in these accounts for reimbursements of claims incurred through December 31, 2020.

Health FSA Carryover Amount Increase

For a health FSA without a grace period, the maximum allowable amount that can be carried over from one year to the next was $500. Notice 2020-33 increases this amount to 20% of the maximum health FSA contribution amount.  For 2020, this means the new carryover limit is $550, as adjusted annually for inflation.

HSA Eligibility and Other Clarifications

Earlier this year, the IRS said that individuals could temporarily receive testing and care for COVID-19 and telemedicine care without jeopardizing their ability to contribute to an HSA.  The new guidance clarifies that this relief applies retroactively to January 1, 2020.

Notice 2020-33 also clarifies the ability of an Individual Coverage Health Reimbursement Arrangement (ICHRA) or the premium reimbursement component of a cafeteria plan to reimburse individual insurance policy premium expenses incurred prior to the beginning of the plan year for coverage provided during the plan year. This means that an ICHRA with a calendar year plan year 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 for the coverage prior to the first day of the plan year.

Next Steps

Paylocity is ready to support our customers and is working on additional resources to help our clients navigate this new relief.

Thank you for choosing Paylocity as your Payroll Tax and HCM partner.

This information is provided as a courtesy, may change and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor.