Section 125: Flexibility for Election Changes and FSAs/DCAPs During COVID-19
Senior Compliance Attorney
On May 12, 2020, the Internal Revenue Service (IRS) issued IRS Notice 2020-29 regarding Section 125 mid-year election changes for employer sponsored health coverage, medical Flexible Spending Arrangements (FSAs) and Dependent Care Assistance Programs (DCAPs). In addition, the notice also allows for increased flexibility in terms of FSA grace periods and unused amounts in DCAPs through December 31, 2020.
Section 125 Mid-Year Election Changes
In general, if an employee elects to have pre-tax salary reductions for benefits offered under an employer’s Section 125 plan, those elections are irrevocable for the plan year. However, previous regulations provided a wide array of acceptable “qualifying events” employers could adopt that would allow participants to change or revoke elections during the plan year. If a qualifying event does not apply, the participant would not be able to initiate, change or revoke an election mid-year.
The COVID-19 pandemic has created many complications in relation to Section 125 election changes. For this reason, IRS Notice 2020-29 provides that mid-year election changes may be allowed during calendar year 2020 without a “qualifying event” in the following situations:
Employer sponsored health coverage
- New elections on a prospective basis can be made mid-year if the employee initially declined employer-sponsored health coverage;
- Current elections can be revoked and new elections made on a prospective basis to enroll in different health coverage sponsored by the same employer;
- Current elections can be revoked on a prospective basis as long as the employee attests in writing that the employee is enrolled or immediately will enroll in other health coverage.
*Please note that the employer may rely on the written attestation provided by the employee, 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.
FSAs and DCAPs
- Current elections can be revoked, decreased or increased and new elections can be made on a prospective basis. Employers are permitted to limit mid-year election changes to amounts no less than amounts already reimbursed.
Employers are not required to provide “unlimited election changes” and are allowed to determine which changes will be permitted. However, all permitted election changes must be made on a prospective basis and employers should be mindful of any changes that might result in failure of non-discrimination requirements. The guidance suggests that employers may want to consider the potential for adverse selection of health coverage by employees and as a result may wish to limit election to situations in which an employee’s coverage will increase or improve.
Employers will need to comply with ERISA notification requirements if changes are made.
This relief may be applied retroactively to periods prior to May 12, 2020 and on or after January 1, 2020 for Section 125 cafeteria plans that prior to the notice permitted mid-year election changes that are consistent with the requirements of the for the relief provided in the notice. In other words, if you already allowed these changed prior to the issuance of the notice, those changes are allowable.
Unused amounts in FSAs or DCAPs: Grace Period or Plan Year ending in 2020
Section 125 plans may be designed to allow participants in a health FSA to carry over amounts up to $500 into the next plan year (this maximum amount increases to $550 in 2020). Section 125 plans may also permit participants to apply unused amounts, either in a health FSA or DCAP, during a grace period of up to two months and 15 days following the end of the plan year. Health FSAs may only adopt a grace period or a carry-over, but cannot apply both. During the COVID-19 pandemic, participants may be more likely to have unused amounts in a health FSA or DCAP for grace periods or plan years ending in 2020.
Notice 2020-29 provides that Section 125 plans may allow unused amounts remaining in a medical FSA or DCAP as of the end of a grace period or plan year ending in 2020 to pay or reimburse medical or dependent care expenses incurred through December 31, 2020. The extension applies to plans that have a grace period or a carry over.
Please note that if an extension is applied to a general health FSA, the extension to use unused amounts will render an individual ineligible to contribute to an HSA during the extended period.
HDHPs and Telehealth/COVID-19 expenses
Under the CARES Act, Health Savings Account (HSA) compatible High Deductible Health Plans (HDHPs) are allowed to cover telehealth and other remote services without causing the HDHP to lose compatibility with HSAs.
Under IRS Notice 2020-15, HSA compatible High Deductible Health Plans (HDHPs) are allowed to cover services, testing and treatment related to COVID-19 without causing the HDHP to lose compatibility with HSAs.
IRS Notice 2020-29 clarifies that both requirements are applicable retroactively to January 1, 2020. In addition, in relation to COVID-19 testing, the panel of diagnostic testing for influenza A & B, norovirus and other coronaviruses, and respiratory syncytial virus (RSV) are to be covered with zero cost sharing as part of the COVID-19 requirements.
Plan Amendments
Employers permitting any of the allowable changes in Notice 2020-29 must adopt a plan amendment. In addition, employers with FSA carry overs must adopt a plan amendment if they wish to implement the new maximum carry-over of $550.
Plan amendments in relation to the 2020 plan year must be adopted on or before December 31, 2021 and may be effective retroactively to January 1, 2020. The amendment must apply only to mid-year election changes made during calendar year 2020 or unused FSA or DCAP expenses incurred through December 31, 2020.
Key Takeaways
Employers have the opportunity to allow mid-year plan changes to Section 125 elections due to federal guidance as a result of the COVID-19 pandemic. In addition, employers will also be able to assist employees with unused amounts in medical FSA or DCAP accounts. Please reach out to your M3 Account Team or your Section 125 Administrator if you have specific questions.
