COVID-19 Relief for Cafeteria PlansAdded by John C. Hughes in Articles & Blogs, Tax Law on May 27, 2020
The federal government continues to provide relief to benefit plans in an effort to provide flexibility in light of the COVID-19 outbreak. Last week, the IRS issued Notices 2020-29 and 2020-33, which generally loosen up rules relative to elections under Internal Revenue Code Section 125 cafeteria plans. In short, the guidance allows for changes to cafeteria plan elections, and then increases the flexible spending account amount that may be carried over and used in a subsequent plan year. These changes are permissive, not mandatory.
Changes to Elections
Elections made under cafeteria plans may not be changed except under enumerated narrow circumstances. Notice 2020-29 generally provides that employers may make changes to their plans as follows:
- During 2020, a cafeteria plan may permit employees who are eligible to make contributions under an employer sponsored plan to, prospectively:
- Make a new election and enroll if the employee initially declined employer-sponsored coverage.
- Revoke an election and make a new election to enroll in different coverage sponsored by the same employer.
- Revoke an existing election (provided that the employee represents in writing that they are enrolled, or will immediately be enrolled, in other health coverage that is not sponsored by the employer).
- Revoke an election, make a new election, or decrease or increase an election relative to a flexible spending account.
- Revoke an election, make a new election, or decrease or increase an election relative to a dependent care assistance program.
- Employers may extend an existing grace period under a cafeteria plan to provide that unused amounts at the end of a grace period or plan year ending in 2020 may be incurred through December 31, 2020; and
- Employers may apply the relief previously provided to high deductible health plans (HDHPs) and expenses related to COVID-19 regarding telehealth services retroactively to January 1, 2020.
This flexibility should assist employers and employees in making necessary adjustments on account of furloughs, decreased business, etc. Employers should be sure to coordinate with involved insurance carriers (including stop loss carriers) before making any changes.
Increased Carry Over Amount
Notice 2020-33 modifies the amount plans may allow employees to “carry over” with respect to healthcare flexible spending accounts under a cafeteria plan. Plans are currently permitted to avoid the “use it or lose it” rule to some extent by allowing employees to carry over up to $500 of unused contributions to pay for expenses incurred in the following plan year. Plans are not permitted to have both a carry over and a grace period.
The new guidance generally provides that employers may amend their healthcare flexible spending account plans to increase the amount of a carry over to $550 (from the existing $500 maximum). The guidance provides for automatic increases in this amount as the amount of the maximum amount that may be contributed to a healthcare flexible spending account during a year (currently, $2,750) increases. The carry over amount going forward will be equal to 20% of the maximum deferral amount (rounded to the nearest $10). This guidance is not framed as relief relating to the COVID-19 emergency; but rather, in response to a previously issued executive order.
If employers determine to make any of these changes, operations should be modified accordingly and participants notified as soon as practicable. Written amendments will be required by December 31, 2021.
If you have questions about how these new options may affect your employee benefits plans, or how to implement changes, please contact a member of our Employee Benefits team.
John C. Hughes, Partner
Cydni Waldner, Attorney
More Tax Law Blog Posts
- 12/22/21—An Update and Important Reminder About State Tax Deductions for Idaho Pass-Through Entities
- 07/15/21—Employee Benefits Alert
- 05/19/21—Tax Updates – the 2021 Idaho Legislature Has Passed Some Significant Tax Bills
- 04/02/21—Benefits Provisions of the American Rescue Plan Act
- 03/22/21—An Interview With Idaho State Tax Commission Chief Operating Officer John Bernasconi
- No upcoming events.