Employers can now allow employees the opportunity to make midyear adjustment to their health insurance plans and flexible spending plans for the 2020 plan year, according to a notice issued by the IRS in response to the coronavirus crisis.
The IRS issued its guidance on May 12, which relaxes the rules relating to election changes for health plans offered under a Section 125 cafeteria plan, including health and dependent care flexible spending accounts (FSAs).
Due to the nature of the COVID-19 public health emergency, some employees’ needs for health coverage may have changed. Therefore, employers may permit employees who are eligible to make salary reduction contributions under a Section 125 cafeteria plan to:
- Make a new election on a prospective basis if the employee initially declined to elect employer-sponsored health coverage;
- Change the existing election and make a new election to enroll in different health coverage offered by the employer; or
- Revoke an existing election 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 recent guidance also gives increased flexibility for grace periods to apply unused amounts in health FSAs to medical care expenses incurred through Dec. 31, 2020, and unused amounts in dependent care assistance programs to dependent care expenses incurred through Dec. 31, 2020. Additionally, the carryover limit for health FSAs under a Section 125 plan increased from $500 to $550 of unused amounts remaining at the end of a plan year. This increase reflects indexing for inflation and parallels the indexing that applies to the limit on salary reduction contributions.
Another change in the IRS notice is that telehealth and other remote care services now qualify as expenses reimbursable by high-deductible health plans.
This new guidance may be applied on or after Jan. 1, 2020, and on or before Dec. 31, 2020, provided that any elections made in accordance with it apply only a prospective basis. Individuals can, during 2020, increase their health FSA contributions or begin to make health FSA contributions as a result of the increased carryover amount. Although only future salary may be reduced under the revised election, amounts contributed to the health FSA after the revised election may be used for any medical care expenses incurred during the first plan year that begins on or after Jan. 1, 2020.
Employers who wish to offer employees midterm adjustments to their Section 125 health plans must prepare a written plan. Any amendments to the 2020 plan year must be adopted on or before Dec. 31, 2021, and may be retroactive to Jan. 1, 2020, provided the employer informs all individuals eligible to participate in the 125 cafeteria plan of the changes.
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