Tax Monitor

Internal Revenue Service Updates Cafeteria Plan And Health Flexible Spending Arrangement Rules In The Face Of COVID-19

May 13, 2020

By: Valerie F. Gainer

With the issuance of Notice 2020-29 and Notice 2020-33, the Internal Revenue Service (“IRS”) increased the carryover amount allowed for health flexible spending arrangements and expanded election rules for cafeteria plans. Employers wanting to offer these new options and provide additional flexibility to their employees must amend their plans.

CARRYOVER AMOUNT INCREASED FOR HEALTH FLEXIBLE SPENDING ARRANGEMENT 

Prior to Notice 2020-33, the carryover amount permitted from health flexible spending arrangements (“HFSAs”) was capped at a firm dollar amount of $500. Now, the IRS is allowing that amount to be adjusted for inflation “to an amount equal to 20% of the maximum salary reduction contribution under Code Sec. 125(i) for that plan year.”ⁱ For the year 2020, the maximum salary contribution is $2,750, and the adjusted carryover amount is $550. Because cafeteria plans are statutorily required to be written plans, an employer with an existing cafeteria plan wanting to take advantage of the increased carryover amount must adopt a plan amendment.ⁱⁱ 

NEW ELECTIONS PERMITTED FOR CAFETERIA PLANS 

Usually, cafeteria plan elections must be made before the beginning of the plan year and are irrevocable.ⁱⁱⁱ Reg. 1.125-4 permits, but does not require, employers to allow modifications to elections for employees experiencing a change in status or substantial changes to healthcare costs.^iv  

In response to COVID-19, the IRS is temporarily expanding permissible mid-year election options in cafeteria plans. Employers may now amend their cafeteria plans to permit employees to make new employer-sponsored health coverage elections on a prospective basis, change an employee’s election for a type of employer-sponsored health coverage (like moving from an individual to a family plan), and cancel participation in employer-sponsored health coverage if the employee provides certain written assurances that he or she will enroll in another health plan.^v  Similarly, employers may provide employees with the opportunity to revoke existing elections, make new elections, or change the amount of a current election for HFSAs and dependent care assistance programs.^vi 

Additionally, the IRS has increased the timeline for making claims against unused funds in HFSAs and dependent care assistance programs.^vii Claims against unused funds in plans with grace periods ending in 2020 or plan years ending in 2020 may now be made through December 31, 2020, if the employer appropriately amends the plan to allow for this extended claim period.^viii 

ⁱ  Checkpoint - 2020 COVID-19 News, IRS increases health flexible spending arrangement carryover amount (05/13/2020).
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ⁱⁱⁱ  Checkpoint - 2020 COVID-19 News, IRS provides cafeteria plan flexibility and high deductible health plan information, Federal Tax Update (05/13/2020).
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• Valerie F. Gainer