On May 12, 2020, the Internal Revenue Service (IRS) issued Notice 2020-29 (the Notice), an important piece of guidance for employers that sponsor health & welfare plans.
The Notice provides much-needed flexibility for employers who are dealing with unexpected requests and circumstances as a result of the 2019-nCoV (COVID-19) pandemic. As discussed below, the Notice permits – but does not require – cafeteria plans to provide additional opportunities for mid-year election changes for health coverage, health flexible spending account (health FSA) coverage and dependent care FSA (dependent care FSA) coverage. It also permits plans to extend the claims periods for health FSA and dependent care FSA expense reimbursement, and it clarifies earlier guidance regarding coverage of telehealth and COVID-19-related items under a high deductible health plan (HDHP).
Mid-Year Changes to Cafeteria Plan Elections
Cafeteria plans give employees the choice between receiving cash or certain non-taxable qualified benefits and allow employees to pay for certain benefits on a pretax basis. To provide these tax advantages to employees, a cafeteria plan must comply with a framework of rules set forth in the Internal Revenue Code and related Treasury regulations (the “Cafeteria Plan Rules”). One particularly complex area of the Cafeteria Plan Rules is the set of rules governing when employees’ cafeteria plan elections may be made and/or changed. As a general rule, cafeteria plan elections must be made before the beginning of a plan year and remain in effect for an entire plan year. In addition, a cafeteria plan may, but is not required to, allow mid-year changes to benefit elections in certain specified circumstances as outlined in the Cafeteria Plan Rules.
The mid-year election change rules have been a source of frustration for many employers and employees recently because in many cases the permitted mid-year election changes are not broad enough to cover situations arising as a result of the COVID-19 pandemic. For example, the Cafeteria Plan Rules generally would not allow an employee who had previously declined health coverage for the plan year to enroll mid–plan year, even if the purpose of the mid-year enrollment request was to obtain coverage for COVID-19 testing or treatment.
In response to the current circumstances, the Notice temporarily expands the mid-year election change rules so that an employer may allow eligible employees to make any of the following mid-year changes to their cafeteria plan elections with respect to coverage during 2020: 1
- For health coverage:
- Make a new election with respect to health coverage, if the employee initially declined to elect health coverage
- Revoke an existing election and make a new election to enroll in different coverage offered by the employer
- Revoke an existing election without enrolling in a different coverage option offered by the employer but only if the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer (the Notice includes sample language to be used for this purpose)2
- For health FSA coverage, revoke an election, make a new election, or decrease or increase an existing election applicable to a health FSA
- For dependent care FSA coverage, revoke an election, make a new election, or decrease or increase an existing election regarding a dependent care FSA.
Note that any mid-year changes allowed as a result of the Notice must be made on a prospective basis only.
Employers are not required to allow any of these additional types of mid-year election changes, and employers can decide to implement some of the changes without implementing all of the changes. For example, an employer could decide to allow employees to enroll in health coverage and make changes to their health FSA contributions in 2020 as permitted by the Notice, but not allow employees to revoke coverage mid-year, unless an employee experiences one of the existing mid-year change events under the Cafeteria Plan Rules. In addition, an employer who allows some or all of these mid-year election changes may impose limitations on the changes an employee can make, such as allowing an employee to switch from self-only to family coverage but not vice-versa. Of course, any changes to an employer’s cafeteria plan to reflect the relief in the Notice, including any limitations imposed on new mid-year election changes, must be implemented in a nondiscriminatory manner as required by the Cafeteria Plan Rules.
These mid-year election change opportunities can be made available only in 2020, absent subsequent action by the IRS to extend the relief. Further, the Notice refers to employer-sponsored health plans but the examples discuss only medical coverage and FSAs. As a result, there is an open question about whether these mid-year changes may be made available for election changes with respect to dental, vision or other health benefits that may be offered under a cafeteria plan.
If an employer decides to allow some or all of these mid-year election opportunities, the cafeteria plan must be amended on or before December 31, 2021. In recognition that some employers may have permitted employees to make similar election changes prior to publication of the Notice, the IRS has decided to allow cafeteria plan amendments with retroactive effective dates that can be as early as January 1, 2020. An employer can amend its cafeteria plan retroactively only if the employer has operated the cafeteria plan in accordance with the Notice and informs all employees eligible to participate in the plan of the changes.
Extension of FSA Claims Periods
The Notice also allows employers to provide employees with additional time in 2020 to request reimbursement from amounts contributed to health FSAs and/or dependent care FSAs.
Under the Cafeteria Plan Rules, an employee generally forfeits any amounts contributed to a health FSA or a dependent care FSA that remain unused at the end of the plan year, unless the cafeteria plan includes one of two limited exceptions to this general rule – a grace period or a carryover feature:
- Grace Period. A cafeteria plan may permit a participant to apply unused amounts in a health FSA or a dependent care FSA at the end of a plan year to pay expenses incurred during a period of up to two months and 15 days immediately after the end of the year.
- A cafeteria plan may permit a participant to carry over up to a specified amount of unused health FSA contributions ($550 for 2020) from one plan year to the next, which a participant may use in the subsequent plan year for reimbursable medical care expenses incurred in that plan year.
These features are optional, and a cafeteria plan may not include both the Carryover and the Grace Period features with respect to a health FSA (dependent care FSAs are not allowed to include a Carryover feature, but may have a Grace Period).
Pursuant to the Notice, if an employee has unused amounts remaining in his or her health FSA or dependent care FSA at the end of a Grace Period or a plan year ending in 2020, the cafeteria 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. For example, for a calendar year plan, the Grace Period for unused amounts from the 2019 plan year could be extended from March 15, 2020 (or an earlier date, if the cafeteria plan has a shorter Grace Period) to December 31, 2020.
For a non-calendar-year health FSA that has a Carryover feature, the Notice permits an employer to implement the extended claims period, notwithstanding the usual rule that a health FSA cannot include both a Carryover feature and a Grace Period. For example, a cafeteria plan with a plan year that runs from April 1, 2019 to March 31, 2020 and already allows participants to carry over up to $500 of unused health FSA contributions into the plan year starting April 1, 2020, could be amended to allow participants also to use any amounts remaining in the health FSA as of March 31, 2020 for reimbursable medical expenses incurred between April 1, 2020 and December 31, 2020.
Note that the Notice does not change the rules governing how health FSA coverage affected an individual’s eligibility to contribute to a health savings account (HSA) – If an individual who had unused amounts at the end of a plan year or Grace Period ending in 2020 is allowed an extended period to incur expenses under a health FSA, as permitted by the Notice, that individual will not be eligible to contribute to an HSA during the extended period, unless the health FSA is a HSA-compatible health FSA.
The IRS is allowing this flexibility in recognition that employees may be more likely to have unused amounts or larger unused amounts as of the end of plan years or Grace Periods ending in 2020 because of the COVID-19 pandemic (for example, because of an unanticipated change in the availability of dependent care).
This change is optional, not required. If changes are made, the same amendment requirements as described above for adding additional mid-year election change opportunities (including requirements for retroactive effective dates) apply.
Clarification of Prior Guidance on HDHPs
Under existing law, an individual is eligible to establish and contribute to a HSA only if the individual is covered under an HDHP as of the first day of the month. Subject to a few exceptions (e.g., preventive care), to be a HDHP, a health plan must require a participant to satisfy a minimum annual deductible and maximum out-of-pocket expense requirement before coverage of medical expenses commences.
The Notice clarifies a number of COVID-19-related issues for HDHPs, specifically:
- The provisions of Notice 2020-15 allowing HDHPs to cover COVID-19 testing and treatment prior to satisfaction of the annual deductible, apply retroactively with respect to reimbursement of expenses incurred on or after January 1, 2020.
- Testing and treatment for COVID-19 pursuant to Notice 2020-15 includes certain additional tests, including the panel of diagnostic testing for influenza A&B, norovirus and other coronaviruses, and respiratory syncytial virus (RSV).
- The CARES Act provisions related to telehealth and remote-care services apply retroactively with respect to services provided on or after January 1, 2020, for plan years beginning on or before December 31, 2021. These CARES Act provisions allow individuals to retain HSA eligibility if they receive telehealth and remote care services outside an HDHP even if coverage under the HDHP is provided before the annual deductible is met.
Related IRS Guidance
Also on May 12, 2020, the IRS issued guidance on the health FSA carryover limit and reimbursement of premiums under individual coverage health reimbursement arrangements. That guidance will be addressed in a separate blog post.
 These mid-year election change opportunities are not required to be limited to individuals who have been impacted by the COVID-19 pandemic, compared, for example, to certain Coronavirus Aid, Relief, and Economic Security (CARES) Act changes for loans and coronavirus-related distributions, which are limited to certain “qualifying individuals.”
 An employer may rely on this written attestation unless the employer has actual knowledge that the employee is not or will not be enrolled in other comprehensive health coverage not sponsored by the employer.
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