Benefit News

IRS Provides Covid-19 Relief to Certain Cafeteria Plan Elections

May 13, 2020

On May 12, 2020, the Internal Revenue Service (IRS) released IRS Notices 2020-29 and 2020-33 to assist employers and employees in responding to the COVID-19 emergency.

IRS Notice 2020-29 provides increased flexibility in permitting mid-year elections under an Internal Revenue Code (Code) Section 125 cafeteria plan during 2020 with respect to employer sponsored health coverage, health care flexible spending accounts (FSA) and dependent care FSAs. In addition, this Notice provides for an extended claims submission period with respect to unused FSA account balances for plan years and grace periods ending in 2020.

IRS Notice 2020-33 increases the amount that may be carried over from one plan year to the next (carryover limit) to reimburse a participant for eligible medical expenses under his or her health care FSA account to reflect an indexing for inflation that is similar to the indexing that applies to the annual health care FSA contribution limit. For the 2020 plan year, the carryover limit is increased to $550. In addition, Notice 2020-33 provides additional clarity to assist employees with implementing individual coverage health reimbursement arrangements (individual coverage HRAs).

Health Coverage Election Changes That Can Be Adopted

For the remainder of 2020, employers may permit mid-year elections under a Code Section 125 cafeteria plan in the following situations, provided the changes are applied only prospectively:

  1. An employee who had previously declined coverage with his or her employer may now make a prospective election to enroll in that health care coverage.
  2. An employee may make a change from his/her current health plan option to enroll (prospectively) in another health care option offered by the employer or enroll in another coverage tier (e.g., self-only to family coverage).
  3. An employee may disenroll from his or her employer’s health plan on a prospective basis as long as he or she attests in writing of his/her enrollment (or intended enrollment) in other health coverage not sponsored by the employer. Notice 2020-29 contains a sample attestation form that could be signed by the employee and relied on to permit the change, provided the employer does not have actual knowledge of the employee’s intent not to enroll in the other coverage.
  4. An employee may revoke a current election, make a new election, or increase/decrease an existing election under his or her health care or dependent care FSA.
  5. An employee may also make an election change to his or her health care FSA to reflect the increase in the carryover limit to $550, if applicable.

Extended Claims Submission Period For Unused Health Care Or Dependent Care Fsa Balances

An employer may amend its health care FSA and/or dependent care FSA to permit an employee to use account balances after expiration of a grace period that ends in 2020 or a plan year ending in 2020 to reimburse eligible medical or dependent care expenses, respectively, incurred through December 31, 2020. This extension of time is also applicable to plans that provide a carryover in lieu of the grace period.

Notwithstanding, if the employee is participating in a general-purpose FSA, he or she will not be able to contribute to a health savings account (HSA) during this extension period.

The following are examples describing how these extensions would be applied to three different scenarios. The first example is with respect to an FSA with a calendar year plan year. The second and third examples involve a cafeteria plan with a plan year of July 1 – June 30.

Example 1: An employer that sponsors a 2019 calendar year health care and dependent care FSA with a grace period ending March 15, 2020, may permit employees to apply unused amounts remaining in the health care or dependent care FSA at the end of the grace period, towards eligible expenses, as applicable, incurred through December 31, 2020.

Example 2: An employer provides a health care FSA that allows a $500 carryover for the 2019 plan year (July 1, 2019 to June 30, 2020). Pursuant to this notice and Notice 2020-33, the employer amends the plan to adopt a $550 (indexed) carryover beginning with the 2020 plan year, and also amends the plan to adopt the temporary extended period for incurring claims with respect to the 2019 plan year, allowing for claims incurred through December 31, 2020, to be paid with respect to amounts from the 2019 plan year.

An employee has a remaining balance in his health care FSA for the 2019 plan year of $2,000 on June 30, 2020, because a scheduled non-emergency procedure was postponed. For the 2020 plan year beginning July 1, 2020, the employee elects to contribute $2,000 to his health care FSA. The employee is able to reschedule the procedure before December 31, 2020 and, between July 1, 2020 and December 31, 2020, incurs $1,900 in medical care expenses. The health care FSA may reimburse the employee $1,900 from the $2,000 remaining in his or her health care FSA at the end of the 2019 plan year, leaving $100 unused from the 2019 plan year. Under the plan terms that provide for a carryover, the employee is allowed to use the remaining $100 in his or her health care FSA until June 30, 2021, to reimburse claims incurred during the 2020 plan year. The employee may be reimbursed for up to $2,100 ($2,000 contributed to the health care FSA for the 2020 plan year plus $100 carryover from the 2019 plan year) for medical care expenses incurred between January 1, 2021 and June 30, 2021. In addition, the employee may carry over to the 2021 plan year beginning July 1, 2021 up to $550 of any remaining portion of that $2,100 after claims are processed for the 2020 plan year that began July 1, 2020.

Example 3: Same facts as Example 2, except that the employee has a remaining balance in his or her health care FSA for the 2019 plan year of $1,250 on June 30, 2020. For the 2020 plan year beginning July 1, 2020, the employee elects to contribute $1,200 to his/her health care FSA. Between July 1, 2020 and December 31, 2020, the employee incurs $600 in medical care expenses. The health care FSA may reimburse the employee $600 from the $1,250 remaining in his/her health care FSA at the end of the 2019 plan year, leaving $650 unused from the 2019 plan year. Under the plan terms, the employee is allowed to use $500 of the $650 unused amount from the 2019 plan year to reimburse claims incurred during the 2020 plan year, and the remaining $150 will be forfeited. The employee may be reimbursed for up to $1,700 ($1,200 contributed to the health care FSA for the 2020 plan year plus $500 carryover from the 2019 plan year) for medical care expenses incurred between January 1, 2021 and June 30, 2021. In addition, the employee may carry over to the 2021 plan year beginning July 1, 2021 up to $550 of any remaining unused portion of that $1,700 after claims are processed for the 2020 plan year that began July 1, 2020.

Individual Coverage Hras

Notice 2020-33 permits a plan to treat a health insurance premium expense as incurred on (1) the first day of each month of coverage on a pro rata basis, (2) the first day of the period of coverage, or (3) the date the premium is paid. Thus, for example, an individual coverage HRA with a calendar year plan year may immediately reimburse a substantiated premium for health insurance coverage that begins on January 1 of that plan year, even if the covered individual paid the premium for the coverage prior to the first day of the plan year.

Action Items For Employers

Health Care Coverage Election Changes

Employers may use their discretion in determining which, if any, of the permitted election changes, they wish to adopt, as long as the permitted election changes are made prospectively, and any changes do not result in its cafeteria plan failing nondiscrimination testing. An employer is also permitted to take into consideration the potential for adverse selection of health coverage by its employees, and accordingly, may wish to limit elections to circumstances in which an employee’s coverage will be increased or improved as a result of the election (for example, by electing to switch from self-only coverage to family coverage, or from a low option plan covering in-network expenses only to a high option plan covering expenses in or out of network). With respect to health care FSA elections, employers may amend their plans to permit individuals to increase their elections or begin making contributions. Employers are also permitted to limit mid-year election changes to amounts no less than those already reimbursed from the participant’s account.

To take advantage of this relief, cafeteria plan documents must be amended prior to December 31, 2021 and may be made effective retroactively to January 1, 2020. Contact your Burnham Benefits Consultant to discuss your options and how adoption of each provision may impact you.

Increase in Carryover Limit After 2020

Health care FSAs that wish to adopt the increased carryover amount for the 2021 plan year have until the last day of the 2021 plan year to amend their documents accordingly.

For additional information, please contact your Burnham Benefits Consultant or Burnham Benefits at 949-833-2983 or inquiries@burnhambenefits.com.


Burnham Benefits does not engage in the practice of law and this publication should not be construed as the providing of legal advice or a legal opinion of any kind. The consulting advice we provide is intended solely to assist in assessing its compliance with the Patient Protection and Affordable Care Act and other applicable federal and state law requirements, and is based on Burnham Benefit’s interpretation of federal guidance in effect as of the date of this publication. To the best of our knowledge, the information provided herein, and assumptions relied on, are reasonable and accurate as of the date of this publication. Furthermore, to ensure compliance with IRS Circular 230, any tax advice contained in this publication is not intended to be used, and cannot be used, for purposes of (i) avoiding penalties imposed under the United States Internal Revenue Code or (ii) promoting, marketing or recommending to another person any tax-related matter.

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