Benefits Buzz

New Cafeteria Plan, Health FSA, and Dependent Care Rules

Posted on May 14th, 2020

The Internal Revenue Service (IRS) recently released Notice 2020-29 and Notice 2020-33 which provide substantial changes to Cafeteria Plans, Health Flexible Spending Accounts (Health FSAs) and Dependent Care Assistance Programs (commonly referred to as Dependent Care FSAs).

In particular, Notice 2020-29 temporarily relaxes election change rules in regard to employer sponsored health coverage, Health FSAs and Dependent Care FSAs. At the option of the employer, the following election changes may be permitted in calendar year 2020:

• An employer may allow an employee to make a new pre-tax election for employer-sponsored health coverage if the employee initially declined such coverage (for example, due to an insurance carrier allowing a midyear special enrollment period to enroll in coverage because of COVID-19).

• An employer may allow an employee to change their pre-tax election to enroll in a different employer-sponsored health plan offered by the same employer (for example, change to a lower premium plan option).

• An employer may allow an employee to terminate their pre-tax election (i.e. drop their employer-sponsored health coverage) provided the employee attests in writing that they are enrolled, or immediately will enroll, in comprehensive health coverage elsewhere.

• An employee may make a new pre-tax election, revoke a pre-tax election, increase a pre-tax election, or decrease a pre-tax election related to Health FSA and Dependent Care FSA coverage for any reason (for example, due to a financial hardship, due to a provider office that has closed or due to a non-emergency medical procedure that has been postponed).

 

Employers may allow such pre-tax election changes at their discretion, including limiting the time period or the number of times that such pre-tax election changes can be made. Any pre -tax election change that is permitted must be made prospectively (i.e. not retroactively).

At the option of the employer, Notice 2020-29 also allows unused funds for Health FSAs and Dependent Care FSAs (related only to plan years or grace periods ending in 2020) to be used for expenses incurred through December 31, 2020.[1] As an example, an employer with a Health FSA plan year that ends on June 30, 2020 could allow employees to continue to use their Health FSA for medical expenses incurred on or before December 31, 2020. In essence, this change allows a longer period of time to incur claims.

Notice 2020-33 also increases the maximum amount of unused Health FSA funds that can be carried over to the following plan year. The new maximum amount is $550 (an increase of $50) effective for plan years starting on or after January 1, 2020.

Employers have until December 31, 2021 to amend their plan documents to allow any or all these described changes authorized in Notice 2020-29 and 2020-33.

 

[1] Please note that extending the time period to incur Health FSA claims may adversely impact a person’ s eligibility to participate in a Health Savings Account (HSA).

 

Have a question about Flexible Spending Accounts?

 

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