The Internal Revenue Service (IRS) issued IRS Notice 2020-29 (Notice) that provides increased flexibility for making mid-year elections or changes under a Section 125 cafeteria plan during calendar year 2020 related to employer-sponsored health coverage, health flexible spending arrangements (health FSAs), and dependent care assistance programs (DCAPs).
This notice also provides increased flexibility with respect to grace periods to apply unused amounts in health FSAs to medical care expenses incurred through December 31, 2020, and unused amounts in dependent care assistance programs to dependent care expenses incurred through December 31, 2020.
Elections Under a Section 125 Cafeteria Plan
The Notice provides that an employer with insured or self-insured coverage may amend a Section 125 cafeteria plan to allow employees to:
- Make a new election for employer sponsored health coverage on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage.
- Revoke an existing election for employer-sponsored health coverage and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis (including changing enrollment from self-only coverage to family coverage).
- Revoke an existing election for employer-sponsored health coverage on a prospective basis, provided that the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer (the employer may rely on the written attestation provided by the employee, unless the employer has actual knowledge that the employee is not, or will not be, enrolled in other health coverage not sponsored by the employer).
- Revoke an election, make a new election, or decrease or increase an existing election regarding a health FSA on a prospective basis.
- Revoke an election, make a new election, or decrease or increase an existing election regarding a dependent care assistance program on a prospective basis.
Below is an IRS example of an acceptable written attestation from an employee revoking coverage due to the employee being enrolled, or immediately will enroll, in other health coverage not sponsored by the employer.
Name: _______________________ (and other identifying information requested by the employer for administrative purposes).
I attest that I am enrolled in, or immediately will enroll in, one of the following types of coverage: (1) employer-sponsored health coverage through the employer of my spouse or parent; (2) individual health insurance coverage enrolled in through the Health Insurance Marketplace (also known as the Health Insurance Exchange); (3) Medicaid; (4) Medicare; (5) TRICARE; (6) Civilian Health and Medical Program of the Department of Veterans Affairs (CHAMPVA); or (7) other coverage that provides comprehensive health benefits (for example, health insurance purchased directly from an insurance company or health insurance provided through a student health plan).
An employer allowing the above permitted election changes is not required to provide unlimited election changes and may determine the extent to which such election changes are permitted. Any of the above permitted election changes must apply on a prospective basis only and must comply with the Section 125 nondiscrimination requirements. The IRS notes that employers may want to consider limiting elections to circumstances in which an employee’s coverage will be increased or improved to prevent adverse selection of health coverage. Changes made to the plan by allowing new permitted election changes should comply with notice requirements that may be applicable, such as Employee Retirement Income Security Act (ERISA) notice requirements.
With respect to health FSAs, this relief applies to all health FSAs, including limited purpose health FSAs compatible with HSAs. In addition, with respect to health FSAs and DCAPs, employers are permitted to limit mid-year elections to amounts no less than amounts already reimbursed.
This relief for Section 125 cafeteria plans may be applied retroactively for the period beginning on or after January 1, 2020, to address the issue of cafeteria plans that allowed one or more of the above election changes prior to the IRS issuing the Notice.
Extended Claims Period for Health FSAs and DCAPs
The Notice provides than an employer may amend a Section 125 cafeteria plan to permit employees to apply unused amounts remaining in a health FSA or a DCAP as of the end of a grace period ending in 2020 or a plan year ending in 2020 to pay or reimburse expenses incurred for the same qualified benefit through December 31, 2020. This relief applies to all health FSAs (health FSAs with a grace period and health FSAs with a carryover), including limited purpose health FSAs compatible with health savings accounts (HSAs).