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Whether you're reading this from your living room while in your pajamas, or safely tucked away in your newly-renovated laundry room turned home office, you'll probably agree that employment has changed over the past several weeks. Because of COVID-19, governors and municipalities have issued stay-at-home and other orders, resulting in the complete or partial shutdowns of many businesses.
Those changes mean that many employees may need increased flexibility for their benefits plans, including employer-sponsored health coverage, health Flexible Spending Arrangements (FSAs), and dependent care assistance programs (in the tax world, we call them section 125 cafeteria plans).
Typically, a cafeteria plan must be written, and offer benefits to all employees that meet the criteria (often, benefits are provided to employees who are full-time and/or have been employed for a certain period). If the plan follows the rules, then the value of those benefits is not includable in the employee's gross income. That's why, for example, you don't pay tax on the cost of health care coverage.
By rule, elections made under a cafeteria plan are irrevocable and are made before the first day of the plan year. However, you can revoke an election during a period of coverage and make a new election under certain circumstances. For example, if you experience a change in status or there are significant changes in the cost of coverage, that would fall under an exception.
If anything says "change," it's the current COVID-19 crisis. As a result, some employers have suggested that they're willing to offer employees who initially declined employer-sponsored health coverage an opportunity to enroll in, switch, or drop health coverage or employer-sponsored health coverage. Additionally, some employees may wish to increase or decrease amounts in their health FSAs or dependent care FSAs. The latter is especially true since many parents - like me - are dealing with unanticipated closure of schools and/or child care providers while figuring out how to work from home.
Unfortunately, it's not clear that the exceptions in Treas. Reg. § 1.125-4 apply to election changes that employees may wish to request for employer-sponsored health coverage, health FSAs, and dependent care assistance programs for reasons related to the COVID-19 public health emergency. That's what brings us to Notice 2020-29, issued just this week by the Internal Revenue Service (IRS).
The Notice provides temporary flexibility for section 125 cafeteria plans to permit employees to make some changes to employer-sponsored health coverage, health FSAs, and dependent care assistance programs. Specifically, an employer, in its discretion, can make changes to allow eligible employees to make salary reduction contributions under the plan.
For employer-sponsored health coverage, the changes would allow employees to:
- make a new election if the employee initially declined to elect employer-sponsored health coverage;
- revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer; and
- revoke an existing election, 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.
Here's an example of an acceptable written attestation:
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).
Signature: ______________________
For health FSAs, the changes would allow employees to:
- revoke an existing election;
- make a new election; or
- decrease or increase an existing election.
For dependent care assistance programs, the changes would allow employees to:
- revoke an existing election;
- make a new election, or
- decrease or increase an existing election.
An employer who takes advantage of this relief is not required to provide unlimited election changes. The employer has discretion to determine which election changes will be permitted and applied, so long as the changes are prospective (no retroactive changes), and the changes to the plan's election requirements do not result in failure to comply with the nondiscrimination rules under section 125.
In addition, the Notice provides that for any unused amounts remaining in a health FSA or a dependent care assistance program as of the end of a grace period or plan year ending in 2020, a section 125 cafeteria plan can allow employees to apply those unused amounts to pay or reimburse medical care expenses or dependent care expenses incurred through December 31, 2020.
For example, if an employer health FSA plan has a calendar year plan year and provides for a grace period ending on March 15 immediately following the end of each plan year, the employer may amend the plan to permit employees to apply unused amounts remaining in an employee's health FSA as of March 15, 2020, to reimburse the employee for medical care expenses incurred through December 31, 2020. This relief applies to all health FSAs, including limited-purpose health FSAs compatible with HSAs (makes sense, right?).
And one more thing: Remember the earlier COVID-19 related relief involving high-deductible health plans (HDHPs) and health savings accounts (HSAs)? Notice 2020-29 clarifies that the relief provided in Notice 2020-15 regarding HDHPs and expenses related to testing for and treatment of COVID-19 applies to reimbursements of costs incurred on or after January 1, 2020. It also clarifies that the tele-health service exemption may be applied retroactively to January 1, 2020.
The discretion part is key: employers may, but do not have to offer this flexibility. If you're not sure about your options, check with your HR or benefits person.
