IRS temporarily increases employer flexibility for employee benefits for 2020
On May 12, 2020 the IRS issued Notice 2020-29 which provides relief for employers with Flexible Spending Arrangements. There were specifically two areas where flexibility was increased by the IRS. The first was permitting employer cafeteria plans to be amended to allow employees to make mid-year changes to employer sponsored health coverage, health Flex Spending Arrangements (FSA’s), as well as dependent care assistance programs (Daycare Flexing) during the calendar year 2020. This amendment period is at the employer’s discretion.
It is important to note that the IRS has granted the relief to the employers not to individual employees themselves. This means that the changes are at the employer’s discretion, and the employer may determine the extent to which such elected changes are permitted and applied. This is not necessarily granting employees unlimited ability to change their elections.
Furthermore, an employee changing his or her employer sponsored health coverage outside of open enrollment presents some challenges. First, if an employee elects to revoke his/her participation in the employer sponsored health coverage, the employee is required to attest to the employer that the employee is enrolled, or immediately will enroll, on other comprehensive coverage that is not sponsored by the employer. Second, the IRS affords the employer the ability to prevent “adverse selection” of health coverage. This basically means that employers may restrict employees from selecting better health coverage. For example, an employee switching from self-only coverage to family coverage.
The second area of additional flexibility was extending the grace period for Health FSA and Daycare Flex. An employer may at its discretion amend its cafeteria plan to permit employees to apply amounts remaining after the grace period that ends in 2020 to pay or reimburse expenses occurring through December 31, 2020.
In the IRS guidance, the IRS provided an example of how this would work. Here is a brief summary:
Employer provides a health FSA under that allows a $500 carryover for the 2019 plan year (July 1, 2019 to June 30, 2020). Employer amends the plan to adopt a $550 (indexed) carryover beginning with the 2020 plan year, and also amends the plan to adopt the temporary extended period for incurring claims with respect to the 2019 plan year, allowing for claims incurred prior to January 1, 2021, to be paid with respect to amounts from the 2019 plan year.
Employee A has a remaining balance in his health FSA for the 2019 plan year of $2,000 on June 30, 2020, because a scheduled non-emergency procedure was postponed. For the 2020 plan year beginning July 1, 2020, Employee A elects to contribute $2,000 to his health FSA. Employee A is able to reschedule the procedure before December 31, 2020 and, between July 1, 2020 and December 31, 2020, incurs $1,900 in medical care expenses. The health FSA may reimburse Employee A $1,900 from the $2,000 remaining in his health FSA at the end of the 2019 plan year, leaving $100 unused from the 2019 plan year. Under the plan terms that provide for a carryover, Employee A is allowed to use the remaining $100 in his health FSA until June 30, 2021, to reimburse claims incurred during the 2020 plan year. Employee A may be reimbursed for up to $2,100 ($2,000 contributed to the health FSA for the 2020 plan year plus $100 carryover from the 2019 plan year) for medical care expenses incurred between January 1, 2021 and June 30, 2021. In addition, Employee A may carry over to the 2021 plan year beginning July 1, 2021 up to $550 of any remaining portion of that $2,100 after claims are processed for the 2020 plan year that began July 1, 2020. A grace period is not available for the plan year ending June 30, 2021.