IRS Provides Relief to Cafeteria Plans in Response to COVID-19

The IRS recently issued new guidance for cafeteria plans and high deductible health plans (HDHPs) pursuant to Notice 2020-29, which is specifically related to circumstances created by the COVID-19 pandemic. It provides for:

  • Expanded opportunities to make mid-year cafeteria plan election changes during 2020.
  • Modification of the grace period rules for cafeteria plans (including health FSAs and dependent care assistance programs) for expenses incurred during 2020.
  • Clarification of the rules for applicable to HDHPs.

Expanded Election Change Rules

Under IRS rules, employees must make salary reduction elections under a Section 125 cafeteria plan before the start of a plan year and those elections cannot normally be changed for the remainder the plan year.  However, a cafeteria plan may permit certain election changes if the employee experiences certain status change events or if there are changes in the cost of coverage.  Those election change rules are elaborate and complicated.  However, they were not written in contemplation of the kinds of circumstances that employees may be facing as a result of the COVID-19 pandemic.  In response, the IRS, pursuant to Notice 2020-29, has relaxed the election change rules for calendar year 2020 only.   In each of the following circumstances, a plan may permit an employee to make an election change even if they change would not otherwise be permitted under the usual election change rules.

  • An employee may make a new election for employer-sponsored health coverage on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage. This assumes, of course, that the employer is willing to allow an employee to make a mid-year election to be covered under a health plan.
  • Similarly, an employee may 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). This also assumes that an employer wishes to make this option available under its health plan.
  • An employee may 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. The employer may rely on the employee’s attestation unless it has actual knowledge that the attestation is false.  While no particular form of attestation is required, the Notice does provide a sample form that an employer could use.
  • An employee may revoke an election, make a new election, or decrease or increase an existing election regarding a health FSA on a prospective basis.
  • An employee may revoke an election, make a new election, or decrease or increase an existing election regarding a dependent care assistance program on a prospective basis.

There are three points worth emphasizing here.

First, these relaxations of the rules are not required.  An employer may adopt all, some, or none of them.

Second, an employer may adopt the rules with limitations to prevent adverse selection.  For example, an employer may limit elections to circumstances in which an employee’s coverage will be increased.  Similarly, an employer may limit elections for health FSAs and dependent care assistance programs to amounts no less than those already reimbursed.  For example, suppose an employee elects a salary reduction before the start of the plan year of $1,000.  He incurs and is reimbursed for $800 of medical expense in the first month of the plan year.  He then seeks to reduce his election pursuant to the relaxed election change rules.  A plan could provide that he cannot reduce his election below $800.

Third, plan amendments will be needed to implement any of these changes.  We’ll have more to say about plan amendments later in this blog.

Modification of Grace Period Rules

To best understand this modification, it will be useful to recall the difference between a grace period and a carryover.  Under the carryover rules, a plan could allow an employee to use amounts remaining at the end of a plan year to pay for expenses incurred at any time during the following plan year; however, the amount carried over could never exceed an amount that is the lesser of unspent funds and a maximum determined under IRS regulations (currently $550 – see our previous blog for more information on this increase.)  Under the grace period rules, a plan could allow an employee to spend any unspent amount remaining at the end of the plan year (regardless of the amount) but could only do so on expenses incurred in the first two and half of months of the following plan year.  A plan could have a grace period or a carry-over but not both. (Of course, it could also have neither.)

The modified rule applies to unused amounts in health FSA or dependent care assistance program at the end of a grace period ending in 2020 or the end of a plan year ending in 2020.  It does not limit the grace period to two and a half months but rather permits the employee to use the unspent funds for expenses incurred at any time through December 31, 2020.  In addition, a plan can have a grace period even if the plan also has a carry-over.

Plan Amendments

Any changes to a cafeteria plan described above must be reflected in a formal amendment to the plan document.  Any amendment to the plan must be adopted by December 31, 2021, but the amendment may be retroactive to January 1, 2020 provided the employer informs all eligible employees of the changes and operates the plan in accordance with the modified rules.  The amendment must be clear that it applies only to elections made in 2020 and expenses incurred through December 31, 2020, as applicable.

Clarification of HDHP Rules Related to COVID-19 Testing and Treatment and Receipt of Telehealth Care

The IRS had previously indicated that in Notice 2020-15 that an HDHP may provide for services and treatment related to COVID-19 prior to satisfaction of the deductible.  Notice 2020-29 clarifies that this relief applies to expenses incurred on or after January 1, 2020.   The notice further clarifies the testing and treatment of COVID-19 includes the panel of diagnostic testing for influenza A & B, norovirus and other coronaviruses, and respiratory syncytial virus (RSV), and any items or services required to be covered with zero cost sharing under the FFCRA and CARES Act.

The CARES Act permitted an HDHP to cover telehealth and other remote care services prior to satisfaction of the deductible.  It also permitted an individual to receive coverage for telehealth care outside of the HDHP without disqualifying that individual from contributing to an HSA.  Notice 2020-29 provides that treatment of telehealth and other remote care services under the CARES Act applies with respect to services provided on or after January 1, 2020, with respect to plan years beginning on or before December 31, 2021.

The information and content contained in this blog post are for general informational purposes only, and does not, and is not intended to, constitute legal advice. As always, for specific questions concerning your health plan, or for help in operating and/or amending your plan in response to COVID-19, please consult your own attorney or advisor.

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