In response to the COVID-19 outbreak, the IRS recently issued guidance to provide greater flexibility to employees eligible for or participating in cafeteria plans, including healthcare and dependent care Flexible Spending Accounts (FSAs) under cafeteria plans. Specifically, IRS Notice 2020-29 provides for additional 2020 mid-year cafeteria plan election exceptions and for certain extensions of the FSA use-it-or-lose-it requirement.
In addition, in recently issued IRS Notice 2020-33, the IRS has announced a non-COVID-19 related increase of the maximum carryover amount for a healthcare FSA, under the inflation indexing rules applicable to the maximum carryover amount.
Mid-year election opportunities for cafeteria plans
The hallmark cafeteria plan requirement is that the election to participate for a plan year (e.g., to make a salary reduction election to fund the employee portion of the employer’s medical plan coverage on a pre-tax basis) must be made prior to the start of the year, and once made must remain in effect (i.e., be irrevocable) for the entire plan year, subject to certain specified exceptions (e.g., marriage or divorce, birth or adoption, new spousal health plan coverage, significant change of cost of coverage).
In response to COVID-19, to afford greater flexibility to participants whose circumstances may have changed (e.g., unanticipated healthcare needs due to COVID-19, or dependent care needs due to school closings) but who would otherwise not have been permitted to make a mid-year election change, the IRS has provided employers that sponsor cafeteria plans with the opportunity, in the full discretion of the employer, to allow new prospective mid-year employee cafeteria plan and FSA elections, for the remainder of 2020 only.
The additional opportunities are to:
- Enroll in the plan (i.e., where enrollment was initially waived);
- Revoke existing enrollment in the plan (i.e., to be covered by healthcare coverage not provided by the employer);
- Change (revoke and re-elect) existing healthcare coverage option to a different coverage option offered by the same employer, including changing self-only coverage to family coverage; or
- Make, revoke, or change (increase or decrease) the amount of an existing salary reduction election under a healthcare FSA or dependent care FSA.
It is noteworthy that for an employer to accept an employee’s revocation of enrollment, the employer must obtain a written attestation from the employee to the effect that the employee is enrolled or will immediately enroll in other comprehensive healthcare coverage not sponsored by the employer. Notice 2020-29 provides an example of an IRS-acceptable employee attestation that can be used for this purpose.
Extension of FSA use-it-or lose-it claim period
In general, any unused funds remaining in an employee’s FSA as of the end of the plan year are forfeited by the employee (the employer receives the forfeited funds). In this regard, a healthcare FSA or dependent care FSA can provide for a grace period of up to 2-1/2 months (until as late March 15 for a calendar year FSA) to incur additional expenses and apply the FSA year-end balance to those expenses. Alternatively, a healthcare FSA that does not provide for a grace period can allow a carryover of the prior year’s unused balance of up to $500 to the following plan year. (The carryover is not available for a dependent care FSA or for a healthcare FSA that provides for a grace period.)
Notice 2020-29 permits employers that sponsor healthcare and/or dependent care FSAs, in the full discretion of the employer, to extend the period to apply unused health and dependent care FSA balances to pay such expenses. Under the Notice, FSA balances unused as of the end of a grace period ending in 2020 (e.g., a 2019 calendar-year FSA that provides a March 15, 2020, grace period and has an unused balance as of that date) can be used to pay or reimburse eligible expenses incurred through Dec. 31, 2020. (This would not be applicable to plans with a plan year ending on or after Oct. 31, 2020, as the use of the available 2-1/2 month grace period would permit post-Dec. 31, 2020, reimbursements of claims without the Notice.)
Increase in healthcare FSA carryover limit
An employer that maintains a healthcare FSA that does not provide for a grace period has the discretion to permit unused balances of up to $500 to be carried forward to the next plan year for availability for eligible healthcare expenses incurred in that year. The $500 limit has been in place since 2013 and is subject to inflation-based indexing.
In Notice 2020-33, the IRS announced a COLA-based increase of the maximum healthcare FSA carryover amount from $500 to $550.
Timing of required plan amendments
Under both Notices, the permitted modifications are employer-discretionary, and if utilized, they must be implemented by plan amendment. The plan amendment must be adopted on or before Dec. 31, 2021, and may be retroactive to Jan. 1, 2020.
Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.
Coronavirus Resource Center
InsightTreatment of carried interest: Treasury and IRS release long-awaited proposed regulationsJonathan R. Collett, Robert Richardt, Moshe BidermanRead the latest guidance on Section 1061 and what types of assets and entities are subject to it, as well as what fund managers should do now.
InsightTreasury releases temporary regulations regarding waiving NOL carrybacks for certain consolidated groupsChris Wray, Cheryl JosephRead how consolidated groups can handle consolidated net operating losses (CNOLs) under the CARES Act with two additional split-waiver elections.
InsightNew IRS guidance on CARES Act waiver of 2020 required minimum distributions includes rollover deadline extensionDana FriedNotice 2020-51 also has a sample plan amendment for letting certain retirement plan participants choose whether to receive a 2020 required minimum distribution.
InsightIRS issues proposed regulations on non-deductibility of certain transportation fringe, transportation, and commuting expenses, including employer-provided employee parkingDana FriedThe IRS has updated guidelines related to “qualified transportation fringe” (QTF) expenses, including employer-provided employee parking expenses. Read more.