The IRS shows off its flexibility: Guidance for cafeteria plans, flexible spending accounts, and high deductible health plans

As the COVID-19 global pandemic continues to impact employers, the IRS has been looking for ways to provide some additional flexibility to employer-sponsored benefit plans. In the past week, the IRS released two notices aimed at assisting employers with their cafeteria plans, health flexible spending accounts (health FSAs), dependent care assistance programs (DCAPs), and high-deductible health plans.

Cafeteria Plan Guidance

Notice 2020-29 (the Notice) provides employers with the opportunity to allow their employees to make mid-year changes to the Section 125/cafeteria plan elections during 2020. Generally, an individual’s election under the employer’s cafeteria plan must be made prior to the start of the plan year. During the plan year, the individual’s ability to make changes to their elections is limited to specific circumstances or permissible events. Changes in status (including changes in employment status), HIPAA special enrollment rights, enrollment in Medicare or Medicaid, and significant cost changes are all events that may allow an individual to make a change to their election. Because these circumstances can be quite limited, many employees who made elections months ago during open enrollment have had to live with benefit elections that may not work best for them during the COVID-19 pandemic.

Under the Notice, the IRS has granted employers temporary flexibility to allow employees to make prospective changes to certain benefit elections. Through the end of 2020, the IRS will allows cafeteria plans to permit the following changes to employee elections, even if they do not otherwise have a permissible event:

Health care coverage changes:
- Newly elect coverage on a prospective basis if the employee initially declined employer-sponsored coverage during enrollment.
- Revoke an existing election and make new election to under a different option offered by the employer on a prospective basis (including switching from self-only coverage to family coverage).
- Revoke an existing election on a prospective basis if the employee attests in writing that the employee is enrolled in or will immediately enroll in other comprehensive health coverage.
Health FSAs and DCAPs:
- Revoke, make a new election, or increase/decrease an existing election.

These changes are not legally required, and an employer does not have to allow for this flexibility (and can keep the current plan terms). The Notice permits employers to make decisions about how flexible they want to be with respect to mid-year changes, such as by limiting the types of changes they will allow, and putting restrictions in place to prevent adverse selection with regards to health care coverage. For example, employers may consider restricting employees to changes that would give them increased health care coverage, such as switching from self-only to family coverage, or from a low option plan that only covers in-network services or treatments to a high option plan covering both in- and out-of-network services or treatments. Importantly, for both health FSAs and DCAPs, the Notice provides that “employers are permitted to limit mid-year elections to amounts no less than amounts already reimbursed.” Employers may consider allowing for a one-time only mid-year open enrollment, or otherwise place restrictions on the time period when the employees can make changes.

Eversheds Sutherland Observation: Employers have broad discretion in deciding how to implement these changes – they can be as flexible as the rule allows, or maintain their current more restrictive set up. In deciding whether and how to implement any changes, employers should consider their employee population’s needs and their ability to implement these changes in a way that is organized and compliant with the law. For instance, employers with plans that are already generous with regard to mid-year elections may decide not implement the new provisions relating to health care election changes.

Any changes will need to be prospective, and the cafeteria plan will still need to comply with the nondiscrimination rules. While cafeteria plan amendments generally need to be made prior to the plan year in which the changes will be applied, the Notice provides that employers have until December 31, 2021 to amend their plans to allow for these changes in 2020. To the extent that employers wish to take advantage of the mid-year change flexibility provided under the Notice, they should keep in mind any employee notification requirements, including any ERISA requirements (including updates to SPDs or SMMs, if applicable).

Health FSA and DCAP Guidance

In general, health FSAs and DCAPs can only reimburse qualified expenses incurred during the plan year unless an exception applies, and any amounts remaining at the end of the year are forfeited. One exception in the case of both health FSAs or DCAPs allows employees to apply leftover amounts to expenses incurred during a “grace period” of up to two and a half months after the close of the plan year. An alternative exception for health FSAs allows employees to “carryover” unused balances of up to $500 remaining at the end of the plan year to be used in the following plan year. Health FSAs can be designed to have a grace period or a carryover, but not both.

Grace periods

The Notice recognizes that COVID-19 may have disrupted employees' ability to use their health FSA and DCAP amounts as of the end of the grace period (i.e., for calendar plan years, March 15, 2020, and for non-calendar year plans, two and a half months following the end of the plan year). The Notice allows cafeteria plans to extend the grace period to allow employees to use leftover amounts to pay or reimburse qualified expenses incurred through December 31, 2020.

Eversheds Sutherland Observation: For calendar year plans, amending the plan to allow for the extended grace period means giving FSA participants access amounts that were technically forfeited as of March 15, 2020. For plans that typically use forfeitures to defray plan administration expenses or offset experience losses, this may require working with the third-party administrator to determine whether those amounts are still available before amending for the extended grace period.

Carryovers

As mentioned above, health FSAs can either have a grace period or a carryover. If a health FSA uses a carryover, any participants who have funds left at the end of the year may carryover up to $500 and use those funds for the entire next plan year. Notice 2020-33 increases the maximum amount that may be carried over in a health FSA from $500 to a maximum of $550, as adjusted annually for inflation. The increase will be applicable for future years, unlike the extended grace period, which is temporary.

Eversheds Sutherland Observation: Since Notice 2020-33 increases the maximum carryover amount for a plan year from a fixed dollar amount ($500) to an indexed amount (20 percent of the maximum salary reduction contribution under Internal Revenue Code §125(i) for that plan year), plans that allow carryovers should consider amending the plan incorporate the maximum carryover by reference going forward.

Like the cafeteria plan amendment period, employers will need to amend their plans to allow for an extended grace period and increased carryover amounts by December 31, 2021.

High-Deductible Health Plans

On March 11 the IRS issued Notice 2020-15, which provided that health plans that otherwise qualify as high-deductible health plans (HDHPs) will not lose that status merely because the plan covers the cost of testing for or treatment of COVID-19 before plan deductibles have been met. In addition, the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act) provided that a HDHP will not fail to be a HDHP because it does not have a deductible for “telehealth and other remote care services.”

Notice 2020-29 clarifies that:

The relief related to testing for and treatment of COVID-19 under Notice 2020-15 applies with respect to reimbursements of expenses incurred on or after January 1, 2020.
Testing and treatment 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” as provided under the Families First Act, as amended by the CARES Act.
The relief under the CARES Act extends to telehealth and other remote care services provided on or after January 1, 2020.

_____

If you have any questions about this legal alert, please feel free to contact any of the attorneys listed under Related People/Contributors or the Eversheds Sutherland attorney with whom you regularly work.

The materials on the Eversheds Sutherland website are for general information purposes only and do not constitute legal advice. While reasonable care is taken to ensure accuracy, the materials may not reflect the most current legal developments. Eversheds Sutherland disclaims liability for actions taken based on the materials. Always consult a qualified lawyer for specific legal matters. To view the full disclaimer, see our Terms and Conditions or Disclaimer section in the footer. Eversheds Sutherland is a provider of legal and other services operating through various separate and distinct legal entities. For further information about these entities and Eversheds Sutherlands' structure please see the Legal Notice page of this website.