COVID-19 Relief for Section 125 Plans and Increase in FSA Carryover (Benefit Minute)
On May 12, the IRS issued 2 separate Notices that address relief for section 125 plans in light of the COVID-19 pandemic and an increase in the maximum carryover for health care flexible spending accounts. While the guidance in both of these Notices is permissive and not required, employers and plan sponsors will want to review this new guidance to determine what action, if any, should be taken.
Notice 2020-29 provides increased flexibility with respect to section 125 health coverage elections/election changes, flexible spending account elections/election changes and unused flexible spending account amounts.
First, it permits employers to allow prospective election changes during calendar year 2020 without a status change event to:
- make a new election for health coverage, if the employee initially declined to elect health coverage for the current plan year
- revoke an existing election for health coverage and make a new election to enroll in different health coverage sponsored by the same employer (including changing plan options or adding dependents)
- revoke an existing election for health coverage, 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
- revoke an election, make a new election, or decrease or increase an existing election regarding a health care flexible spending account (HCFSA)
- revoke an election, make a new election, or decrease or increase an existing election regarding a dependent care flexible spending account (DCFSA)
In general, the Notice permits employers to disregard section 125 status change rules for the remainder of calendar year 2020 as long as the employee is enrolled in some type of health coverage. The Notice does not permit an employee to drop health coverage due to financial hardship or a similar reason.
While employers may want to be as flexible as possible in light of the COVID-19 pandemic, they should also consider the administrative burdens and disruption associated with allowing these changes, as well as the potential for adverse selection of health coverage by employees. Employers should also confirm that insurance carriers will accommodate these changes, since carriers generally require a status change for mid-year coverage changes. For HCFSAs and DCFSAs, employers are permitted to (and should) limit mid-year election changes to amounts no less than what has already been reimbursed.
Second, the Notice states that unused amounts remaining in a HCFSA or DCFSA at the end of a plan year ending in 2020 or a grace period ending in 2020 can be used to pay or reimburse expenses incurred on or before December 31, 2020. Use-it-or-lose-it will not apply until December 31, 2020 if the employer adopts this change. The extension of time to incur claims can also be applied to a HCFSA plan with a carryover. This relief is particularly helpful for non-calendar year plans since individuals were in jeopardy of forfeiting amounts due to postponement of elective medical procedures, lack of access to providers and closed day care facilities.
An individual covered under a general purpose HCFSA with unused amounts at the end of the 2020 plan year who is allowed the extended grace period to incur expenses will not be eligible to contribute to a health savings account (HSA) until January 1, 2021.
It is the employer’s decision whether to permit the extended time period to incur health care and dependent care expenses. For employers with non-calendar year plans, many will likely wish to allow this to accommodate employees and minimize forfeitures. For calendar year plans where 2019 claims submission run-out has ended, the carryover has been determined (if applicable) or the 2½ month claims grace period has ended (if applicable), the extended grace period to submit claims may be unnecessary.
Employers that wish to offer any or all of the relief described above must amend their section 125 plan documents. An amendment for the 2020 plan year must be adopted on or before December 31, 2021, and may be effective retroactively to January 1, 2020, provided that the section 125 plan operates accordingly, and the employer informs all eligible employees of the changes.
Finally, Notice 2020-29 clarifies that the relief applicable to HSA eligibility with respect to expenses related to testing for and treatment of COVID-19 and expenses for telehealth and other remote care services (i.e. expenses covered by a QHDHP without being subject to the minimum QHDHP deductible) is retroactive to January 1, 2020.
Notice 2020-33 increases the maximum HCFSA carryover ($500 prior to this guidance). For plan years starting in 2020 or later, the maximum carryover for the HCFSA is to be determined by taking 20% of the HCFSA annual contribution maximum. For plan years beginning in 2020, the HCFSA annual contribution limit is $2,750, so the adjusted maximum carryover is $550. The higher carryover amount can be adopted by any HCFSA plan that started in 2020, even if the plan year has already begun.
In subsequent years, as the HCFSA annual contribution limit is increased (indexed for inflation and rounded to the nearest $50), the carryover amount will increase in $10 increments.
Employers are not required to adopt this change and a plan can have a limit on the carryover which is below the maximum allowed amount. Implementation of this change requires adoption of a written amendment, either as a specific dollar amount or as an automatic adjustment each year for the indexed amount. Most HCFSA plans currently automatically adjust the annual contribution limit to the indexed amount and will likely want to do the same for the carryover. Generally, a plan change must be adopted no later than the last day of the plan year. However, for purposes of the 2020 plan year only, the IRS will permit a plan amendment to be effective for 2020 so long as it is adopted on or before December 31, 2021, provided eligible individuals are informed of the change.
This Notice makes reference to Notice 2020-29 and states that, while mid-year HCFSA elections are prospective only, the newly elected health FSA funds would be available to reimburse any medical expense incurred during the plan year that began in 2020.
Employers considering adoption of some or all of this relief should carefully consider administrative issues, as well as confirm that insurance carriers and FSA administrators are willing and able to handle accordingly.