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IRS Relaxes Rules for Cafeteria Plan Mid-Year Election Changes

On Behalf of | May 20, 2020 |

The IRS, in Notice 2020-29, has relaxed the mid-year election change rules for cafeteria plans due to the nature of the public health emergency imposed by COVID-19, extended grace and carryover periods for certain plans, and clarified the rules for HSA contributions.

Election Changes: For mid-year elections made during calendar year 2020, a cafeteria plan may (but is not required to) be amended to permit employees who are eligible to make salary reduction contributions under the plan to:

  1. (a) make a new health coverage election on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage; (b) revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis; and (c) revoke an existing health care coverage election on a prospective basis, provided that the employee attests in writing that he or she is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer. (The Notice provides a sample attestation form that may be used for this purpose.);
  2. revoke an election, make a new election, or decrease or increase an existing election, for a health FSA on a prospective basis; and
  3. revoke an election, make a new election, or decrease or increase an existing election for a dependent care FSA on a prospective basis.

Grace Periods and Carryovers: For unused grace period or carryover amounts remaining in a health or dependent care FSA for a plan year ending during 2020, a cafeteria plan may be amended to allow employees to apply those unused amounts to pay or reimburse medical care or dependent care expenses, respectively, if they are incurred before January 1, 2021.

An amendment for the 2020 plan year must be adopted on or before December 31, 2021, and may be effective retroactively to January 1, 2020. Health Savings Accounts (“HSAs”) and High Deductible Health Plans (“HDHPs”): The Notice provides that an individual who had unused amounts remaining at the end of a plan year or grace period ending in 2020 and who is allowed an extended period to incur covered expenses under a health FSA pursuant to a plan amendment as mentioned above will not be eligible to contribute to an HSA during the extended period (except in the case of a Limited Purpose Health FSA).

Also, an otherwise eligible individual with coverage under an HDHP may receive coverage for telehealth and other remote care services outside of the HDHP and before satisfying the HDHP’s deductible and still be eligible to contribute to an HSA. Therefore, for example, an otherwise eligible individual with coverage under an HDHP who also received coverage for telehealth and other remote health care services under an arrangement that is not an HDHP and before satisfying the deductible for the HDHP will not be disqualified from contributing to an HSA during 2020.

Increase in carryover maximum: Another IRS Notice (2020-33) clarifies that the Internal Revenue Code increases the maximum $500 carryover amount for a plan year to an amount equal to 20 percent of the maximum salary reduction contribution (currently $2,750, as indexed). Therefore, the maximum amount allowed to be carried over to 2021 is now $550.

The Notices can be found at: https://www.irs.gov/pub/irs-drop/n-20-29.pdf and https://www.irs.gov/pub/irs-drop/n-20-33.pdf