COVID-19-Related Cafeteria Plan Relief and HDHP Clarification
In response to the COVID-19 pandemic, the IRS recently issued Notice 2020-29 allowing cafeteria plans to permit certain prospective midyear election changes. The guidance also allows cafeteria plans to provide an extended period for using amounts remaining in a Health Flexible Spending Arrangement (FSA) or dependent care assistance program (DCAP) to pay or reimburse medical or dependent care expenses. Plus, the notice clarifies recent COVID-19-related relief for high-deductible health plans (HDHPs).
Election change relief
Cafeteria plans can now be amended to allow one of four prospective election changes during calendar year 2020:
- New elections for employer-sponsored health coverage by employees who initially declined coverage,
- Elections to enroll in different health coverage sponsored by the same employer (including a change from self-only to family coverage),
- Revocation of existing elections for employer-sponsored health coverage, with a written attestation that the employee is — or immediately will be — enrolled in other “comprehensive” health coverage not sponsored by the employer, or
- Health FSA or DCAP election changes (including revocations, increases, decreases or new elections).
These additional election changes are permitted regardless of whether the basis for the change meets the requirements of the IRS election change regulations. The relief may be applied retroactively to periods between January 1, 2020, and the notice’s issue date. This will address plans that permitted election changes before the issue date that otherwise met the notice’s requirements.
Employers using the relief can determine the extent to which the additional elections will be permitted (considering the potential for adverse selection) so long as:
- Any permitted changes are nondiscriminatory, and
- They rely on an employee’s attestation regarding other coverage absent actual knowledge to the contrary. (Sample language is provided.)
Employers are also reminded of the application of other laws — for example, notice requirements under the Employee Retirement Income Security Act.
Health FSA and DCAP claims
Plans may be amended to permit employees to use amounts remaining in a Health FSA or DCAP at the end of a plan year or grace period ending in 2020 to pay or reimburse expenses incurred through December 31, 2020. (As usual, Health FSAs can reimburse only medical care expenses, and DCAPs can reimburse only dependent care expenses.)
Examples illustrate how this relief applies to Health FSAs that provide for carryovers. The notice cautions that, if the period for incurring claims is extended under a Health FSA that isn’t (or isn’t amended to be) compatible with a Health Savings Account (HSA), an individual with unused amounts remaining at the end of a plan year or grace period ending in 2020 will be ineligible to contribute to an HSA during the extended period.
Plan amendments are needed to use the election change or claims relief, as well as to access the increase in carryover amounts permitted under IRS Notice 2020-33. Amendments for the 2020 plan year must be adopted on or before December 31, 2021. They may be effective retroactively to January 1, 2020, if the plan operates in accordance with applicable requirements and eligible employees are informed of the changes.
The notice explains that recent relief allowing HDHPs to provide benefits for COVID-19 testing and treatment on a no- or low-deductible basis applies to reimbursements of expenses incurred on or after January 1, 2020. It also provides clarifications regarding the items and services covered by this relief.
In addition, the notice clarifies that relief under the Coronavirus Aid, Relief, and Economic Security Act regarding telehealth and other remote care services for plan years beginning on or before December 31, 2021, applies to services provided on or after January 1, 2020.
Employers have been seeking cafeteria plan relief in connection with the COVID-19 crisis and will no doubt appreciate being able to offer additional flexibility to employees. If your organization offers a cafeteria plan, be sure to familiarize yourself with the relief in the recent notice, keeping in mind that the election change and claim provisions are discretionary and will require plan amendments.
Note also that key cafeteria plan principles remain in place: retroactive election changes generally aren’t permitted, and unused contributions must be forfeited subject to limited exceptions (for instance, for Health FSA carryovers or a grace period). Finally, check with your CPA or benefits advisor on whether additional guidance has come out, or further legislation passed, that might affect the information above.