On Tuesday, May 12, 2020, the IRS issued guidance that provides employers with the flexibility to allow participants to make mid-year cafeteria plan election changes due to the COVID-19 pandemic. The guidance also allows employers to provide participants with additional time to access unused flexible spending account (FSA) contributions.
Election Changes. Employers may (but are not required to) allow participants to make prospective mid-year cafeteria plan election changes during the 2020 calendar year to:
- Enroll in health coverage after previously declining such coverage during open enrollment.
- Change health plan options (e.g., move from the plan’s high deductible health plan option to the PPO option).
- Drop health coverage, provided the participant attests in writing he or she is enrolled, or will be enrolling immediately, in other health coverage.
- Change healthcare FSA elections to start, stop, increase, or decrease contributions.
- Change dependent care FSA elections to start, stop, increase, or decrease contributions.
Employers who wish to implement one or more of the permitted mid-year election changes will need to determine the parameters for doing so (e.g., the time period during which election changes may be made, whether all new health coverage enrollments will be permitted, or whether new enrollments will be limited to changes in coverage tiers, such as employee-only to family coverage).
Unused FSA Contributions. Employers may (but are not required to) allow participants to use otherwise forfeited funds remaining in the participant’s healthcare or dependent care FSA as of the end of a grace period or plan year ending in 2020 to reimburse eligible expenses incurred until December 31, 2020.
This would include, for example, unused funds remaining at the end of the March 15, 2020 grace period for a calendar year plan, as well as unused funds remaining at the end of a non-calendar plan year ending in early 2020.
Employers who offer healthcare FSAs and health savings accounts (HSAs) will need to determine whether the extension period is beneficial for HSA-eligible participants. An otherwise HSA-eligible participant who is permitted to continue to access unused traditional healthcare FSA funds will be disqualified from making or receiving pre-tax HSA contributions during the extension period.
FSA Carryover. The guidance also allows employers to increase the maximum healthcare FSA carryover amount from $500 to $550 for plan years beginning on or after January 1, 2020. As a reminder, a healthcare FSA may have a grace period feature or a carryover feature, but not both.
Next Steps. An employer who chooses to make any of the permitted cafeteria plan or FSA changes will need to adopt a plan amendment to reflect such changes no later than December 31, 2021. The amendment can be effective retroactively to January 1, 2020, as long as the plan is operated in compliance with these changes and the changes are communicated to all eligible employees. Either way, such changes will require updated participant communications, as well as an updated summary plan description or summary of material modifications.
For more information about how the permitted cafeteria plan and FSA changes will impact your plan, please contact your SGR Employee Benefits and Executive Compensation Team.