On May 12, the IRS released two notices providing relief on cafeteria plan election rules and increasing the allowed health FSA carryover.
The first notice, IRS Notice 2020-29, provides for increased flexibility with respect to mid-year elections under a §125 cafeteria plan during calendar year 2020 related to employer-sponsored health coverage, health FSAs, and dependent care assistance programs. The notice also provides increased flexibility with respect to grace periods to apply unused amounts in health FSAs to medical care expenses incurred through December 31, 2020, and unused amounts in dependent care assistance programs to dependent care expenses incurred through December 31, 2020.
For mid-year elections made during calendar year 2020, a cafeteria plan may permit employees who are eligible to make salary reduction contributions under the plan to:
o with respect to employer-sponsored health coverage:
- make a new election on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage.
- revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis.
- 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.
o revoke an election, make a new election, or decrease or increase an existing election applicable to a health FSA on a prospective basis.
o revoke an election, make a new election, or decrease or increase an existing election regarding a dependent care assistance program on a prospective basis
For unused amounts remaining in a health FSA or a dependent care assistance program under the cafeteria plan as of the end of a grace period or plan year ending in 2020, the plan may permit employees to apply those unused amounts to pay or reimburse medical care expenses or dependent care expenses, respectively, incurred through December 31, 2020.
The notice also clarifies that the CARES Act provisions allowing a high deductible health plan to cover remote care services before the deductible has been met through the end of the plan year beginning on or before December 31, 2021 can be applied retroactively to January 1, 2020.
The text of this notice is available here.
The second notice, IRS Notice 2020-33, increases the carryover limit (currently $500) of unused amounts remaining as of the end of a plan year in a health FSA under a cafeteria plan that may be carried over to pay or reimburse a participant for medical care expenses incurred during the following plan year. The notice increases the maximum $500 carryover amount for 2020 or later years to an amount equal to 20% of the maximum health FSA salary reduction contribution for that plan year.
Under the notice, the health FSA maximum carryover from a plan year starting in calendar year 2020 to a new plan year starting in calendar year 2021 is $550.
The text of this notice is available here.