There is a saying about change by William Arthur Ward that I once read, “The pessimist complains about the wind; the optimist expects it to change; the realist adjusts the sails.” If there is one thing that we can count on from a regulatory perspective, it is that we need to learn to adjust the sails and do so quickly. We have received numerous questions from clients over the past few weeks about the changes an employee may make to benefits received through Section 125 pre-tax plans. It has been difficult to respond because none of the guidance up to this point has provided any clear relief for flexible spending accounts, dependent care accounts, or pre-tax benefit elections. However, yesterday the IRS issued two notices – Notice 2020-29 and Notice 2020-33 that provide welcome flexibility for employers.
The IRS rules generally require elections made under Section 125 plans to be irrevocable during the plan year, unless an employee experiences a qualifying mid-year change event (e.g., a change in status that results in a corresponding change in eligibility). IRS Notice 2020-29 permits employers during the 2020 calendar year to amend their plans to allow for some additional mid-year changes that are not permitted under normal circumstances. The new guidance permits plans to allow employees to make the following changes on a prospective basis:
- Make a new election for health benefits if the employee initially declined the employer plan;
- Change an existing election for health benefits including changing plans offered by the employer and changing coverage level (for example, an employee may change from an HDHP plan to PPO coverage offered by the employer or change from employee only to family coverage);
- Drop coverage if the employee attests that they intend to enroll in other group health insurance coverage;
- Change or revoke a health care flexible spending account election; and/or
- Change or revoke a dependent care flexible spending account election.
Further, elections made for flexible spending accounts, are generally use-it or lose-it. If account balances are not used by the end of the plan year (or grace period for plans that provide for a 2.5 month grace period), the money is forfeited by the participant and retained by the plan and applied to the costs of administering the plan. The new guidance also provides flexibility for employers to allow employees an additional period of time to use unspent flexible spending account balances. This relief applies only to non-calendar year plan years ending in 2020 or plan years ending in 2019 that have a grace period that extends into 2020. These plans may be amended to allow a participant to use funds that otherwise would have been forfeited during the 2020 calendar year for expenses incurred through December 31, 2020.
This relief is available to all health and dependent care flexible spending account plans, including those health flexible spending accounts that are limited purpose or health savings account compatible.
IRS Notice 2020-33, provides additional relief for health care flexible spending account plans that have a carryover feature. A carryover feature allows participants to carryover up to $500 from the previous plan year into the subsequent plan year. For plan years beginning in 2020, the maximum amount of carryover a plan can allow has been increased from $500 to $550. This amount will now be indexed for inflation on an ongoing basis.
For employers that sponsor high deductible health plans, be aware that this relief did not change the rules regarding the interaction of flexible spending accounts and health savings accounts (HSAs). Employees that participate in a flexible spending account with a rollover provision, a 2 ½ grace period, or are offered an extended coverage period are ineligible to make HSA contributions for the duration of the coverage period (unless the flexible spending account is HSA compatible or amended to be HSA compatible).
All of the relief offered by the guidance is completely optional. Employers may choose whether to adopt some of the provisions, all of the provisions, or none of the provisions. Employers who wish to provide this flexibility to plan participants will need to amend their plans and have until December 31, 2021, to do so. Plan amendments may be adopted retroactively to January 1, 2020, as long as plan participants are informed of the changes and the plan is operated in accordance with those changes.
Please contact your HORAN representative with any questions.