To increase flexibility over aspects of Section 125 cafeteria plans, the IRS recently issued Notice 2020-29 (Notice) that gives employers the choice to allow employees to make new mid-year election changes regarding their health care coverage, health care FSA and/or dependent care FSA. Employers may also expand the claims period for using health care FSA and/or dependent care FSA funds after the end of a grace period or plan year. These changes—which employers may, but are not required to, adopt—are temporary during 2020 and reflect the unanticipated changes brought by the COVID-19 pandemic.
Below is a brief summary of the changes allowed by the Notice and a list of key action steps required to implement any of these options.
New Elections Under Section 125 Cafeteria Plans
As a general rule, employee elections under a Section 125 cafeteria plan cannot be changed mid-year unless the employee experiences a change-in-status event or there are significant changes in the cost of coverage. Without one of these situations applying, the employee is locked into the elections made prior to the start of the plan year.
Under the Notice, employers may now give their employees broad ability during the remainder of 2020 to make the following mid-year changes on a prospective basis:
Extension of Claims Period for Health Care FSA and Dependent Care FSA
The Notice also allows employers to adopt the following optional changes regarding their health care FSA and/or dependent care FSA programs:
As a reminder, participating in a health care FSA during a grace period can disqualify a person from participating in a health savings account (HSA), and the IRS specifically noted that this same rule applies to the special extension period. As a result, employees benefitting from this special extension period may be ineligible to contribute to an HSA during any months of 2020 (unless the health care FSA is designed to be compatible with an HSA, such as certain limited-purpose health care FSAs).
Action Steps to Implement Changes
If your organization would like to make any of these changes, you must:
There are many factors that may affect whether and how you adopt any of these changes. If you would like to discuss implementing these changes, please contact Norbert Kugele, Stephanie Grant or any other member of Warner’s Employee Benefits/Executive Compensation Practice Group.
