Many employees have been forced or have decided to postpone medical procedures in 2020 due to the COVID-19 pandemic. Employees are also experiencing child care uncertainties such as closed daycare centers or cancelled summer child care programs or camps related to COVID-19. Due to the pandemic many employees who had previously elected to make pre-tax contributions to their cafeteria plan related to health flexible spending arrangements (FSA) or dependent care assistance programs aren’t sure that they will need or be able to spend those contributions during the 2020 plan year.
In order to provide relief, the IRS has issued new guidance in Notice 2020-29 allowing employers the ability to amend their cafeteria plans to allow employees to change their current health FSA and dependent care assistance program elections on a prospective basis. Specifically, an employer may adopt an amendment that would allow employees the ability to make a new election, revoke a previous election, or adjust their previous elections regarding their pre-tax health FSA and/or dependent care assistance programs. Employers that elect to allow this are permitted to limit the change or revocation of a previous election to amounts no less than those that have already been reimbursed from the health FSA and dependent care assistance accounts.
Also, included in Notice 2020-29 is the ability for employers to permit changes to the employee’s health care coverage elections. Employers are able to permit employees to make the following changes on a prospective basis:
1) Revoke health care coverage if you confirm in writing that you will get coverage elsewhere
2) Revoke an existing election and make a new election to enroll in different employer sponsored health care coverage
3) Make a new election to be covered under the employer sponsored health plan if you initially declined coverage
Other changes included a temporary change allowing more flexibility for grace periods related to health FSA and dependent care assistance programs and a permanent increase of the health FSA carryforward limit to 20% of the pre-tax health FSA contribution limit adjusted for inflation. For plan years starting in 2020, you will be allowed to carryover $550 to the 2021 plan year (Notice 2020-33).
If an employer chooses to implement any of the above provisions, a plan amendment will be required and must be adopted on or before December 31, 2021.