New IRS Notices Give Employers More Section 125 Plan and Health FSA Flexibility

New IRS Notices Give Employers More Section 125 Plan and Health FSA Flexibility

In response to COVID-19, the Internal Revenue Service (IRS) recently published Notices 2020-29 and 2020-33.  Notice 2020-29 gives employers immediate new options when it comes to their Section 125 cafeteria plans in 2020, and Notice 2020-33 allows for an annual raise in the health flexible spending arrangement (Health FSA) maximum carry-over amount.

Notice 2020-29 temporarily provides cafeteria plan rule flexibility for the 2020 calendar year for both fully-insured and self-funded employer group health plans in response to the COVID-19 pandemic. Employer group health plan sponsors now have the opportunity to allow qualified employees to make mid-year election changes on a prospective basis only. The new mid-year election changes an employer could select include:

  • Allowing qualified employees who did not enroll during open enrollment to make a new health coverage initial election,
  • Allowing employees to revoke an initial election and change to a new health coverage option sponsored by the employer,
  • Allowing employees to revoke an existing major medical plan election and drop the employer’s coverage – provided the employee attests that they will immediately enroll in other health insurance not sponsored by the employer.
  • Revoking, decreasing or increasing Health FSA elections
  • Revoking, decreasing or increasing dependent care assistance program elections

It is important to note that employers do not have to allow employees any of these options, or they could pick just some of them, such as enabling changes to Health FSA and dependent care elections. Employers also have to be mindful about carrier and stop-loss provider contract requirements if they want to consider health plan election changes, as well as general plan administrative considerations. Additionally, employee notification and communications and the possible impact on Section 125 plan nondiscrimination requirements warrant attention.

In addition to election changes, Notice 2020-29 allows employers the option to extend the period to use Health FSA grace period monies leftover from the 2019 plan year up to one year. All money would still need to be spent by December 31, 2020, for calendar-year plans, so only non-calendar year plans would likely find this relief beneficial.

Starting with the 2020 plan year, Notice 2020-33 allows employers to increase the maximum annual Health FSA carry-over amount from $500 to 20 percent of the maximum salary reduction contribution set by the IRS for that calendar year.  In 2020, that amount is $550.

Both notices make it clear that if an employer wants to make any of the Section 125 plan changes allowed through these two notices, then they will need to adopt appropriate Section 125 written plan document amendments. The guidance gives employers until December 31, 2021, to complete the plan amendments, and they can be retroactive back to January 1, 2020, as long as an employer provides appropriate notice.