At some point, we are going to write a blog post that doesn’t relate to the coronavirus. Unfortunately, this is not the week friends. We need to talk about the Internal Revenue Service (IRS) guidance that gives employers new Section 125 cafeteria plan options due to COVID-19, aka Notices 2020-29 and 2020-33.
Notice 2020-29 allows for new mid-year election changes and changes to health flexible spending arrangement (Health FSA) grace and claims periods. Notice 2020-33 provides for an annual raise in the Health FSA maximum carry-over amount.
Two topics keep coming up when we explain the new IRS guidance to other people. So, we thought we’d chat about them here too.
Before we delve into those nuances, first, here is an overview of the two new IRS notices.
In response to the COVID-19 pandemic, Notice 2020-29 provides temporary cafeteria plan rule flexibility for the 2020 calendar year. If an employer plan sponsor wants to, they can now give their qualified employees the ability to make mid-year election changes. These changes may only apply on a prospective basis, and the employer gets to choose if, when, and how to allow them.
The new mid-year election changes an employer could select include:
In addition to election changes, Notice 2020-29 allows employers the option to extend the period to use Health FSA grace period monies leftover from the 2019 plan year up to one year. All money would still need to be spent by December 31, 2020, for calendar-year plans, so only non-calendar year plans will likely find this relief beneficial.
Starting with the 2020 plan year, Notice 2020-33 allows employers to increase the maximum annual Health FSA carry-over amount from $500 to 20 percent of the maximum salary reduction contribution set by the IRS for that calendar year. In 2020, that amount is $550.
Both notices specify that if an employer wants to make any of the Section 125 plan changes allowed through these two notices for 2020, they will need to adopt appropriate Section 125 written plan document amendments by December 31, 2021. Amendments may be retroactively dated back to January 1, 2020, as long as an employer provides appropriate notice.
One of the most common questions we’ve been getting about the new guidance is if employers have to change anything about their plans. Or, if plan sponsors have to make all of the changes allowed by the notices. The short answer to both of those questions is no.
The longer answer is both Notice 2020-29 and 2020-33 make specific mid-year Section 125 plan modifications permissible, but none of the choices available to employers are mandatory. Employers can opt to allow any, all, or some of the new changes. They can also set specific election windows, limiting the time of any mid-year election changes they choose to adopt. When deciding what to do, plan sponsors should consider which, if any, changes they can administer responsibly and efficiently. Employers also need to determine if there are any carrier or stop-loss provider contract requirements regarding potential health plan election changes, and if so, how do they factor in?
Another critical point--as tempting it might be, employers cannot use the new guidance to address a specific employee’s problem or desire to change plan elections. Any alteration an employer makes to its Section 125 plan policies for the 2020 plan year must both follow the new guidance and comply with longstanding group health plan and Section 125 plan nondiscrimination requirements.
Here are two practical examples of what we mean:
A group of parents who all work for the same employer approach human resources. These employees are concerned that due to COVID-19, most daycares and camps are closed, so they cannot spend all of the dependent care assistance money they planned to set aside during 2020.
To address the situation, the employer CAN decide to allow ALL employees to elect to reduce or stop dependent care payroll tax deductions for the year. The employer can also establish a specific enrollment window between now and the end of 2020 to limit when employees can make these changes.
The employer CANNOT let whichever employees mention the issue to human resources cancel or reduce their dependent care elections whenever they want between now and the end of 2020.
An employer must reduce salaries and hours due to the COVID-19 economic downturn, but all employees remain eligible for the group's major medical plan. Some employees respond that now, due to reduced income, they do not personally feel like they can afford their share of the group health insurance premiums.
An employer CAN allow ALL employees to revoke an existing major medical plan election and drop the employer's coverage, provided the employee attests that they will immediately enroll in other health insurance not sponsored by the employer. An example of other coverage might be subsidized individual coverage through a state-based exchange with a current open enrollment period.
An employer CANNOT allow any employee who claims a financial issue to drop their Section 125 major medical plan election whenever they want.
A second issue that we’re getting lots of questions about concerns how the Health FSA grace period relief outlined in Notice 2020-29 works with the “outbreak period” relief in the emergency regulation, “Extension of Certain Timeframes for Employee Benefit Plans, Participants, and Beneficiaries Affected by the COVID–19 Outbreak.” In case you blacked out for a few minutes due to all of the coronavirus-related employee benefit plan changes lately, here’s how the new rule works. It requires all employers subject to ERISA to disregard the period between March 1, 2020, until 60 days beyond whenever the Trump Administration declares the end of the COVID-19 national emergency period when it comes to employee benefit claims submissions and other crucial deadlines. This period is known as the “outbreak period.” Now group plan sponsors have to allow participants their typical length of time to file claims (including Health FSA reimbursement claims), plus the whole “outbreak period.”
The outbreak period claims relief is automatic—it applies to virtually all employee benefit plans. The Notice 2020-29 relief additional optional Health FSA claims submission relief for 2019 plan year. The Notice 2020-29 provisions can overlay with the "outbreak period" relief, but only if the employer plan chooses to extend their Health FSA claims period for 2019.
Here are two examples of how this could work:
An employer offers a Health FSA, but does not adopt the new extended claims period allowed by Notice 2020-29.
An employer offers a calendar-year health FSA with a 90-day claim filing grace period. A person typically would have until March 30, 2020, to file a 2019 claim for reimbursement. Now, assuming the "outbreak period" ends on August 1, 2020, the person has until August 30, 2020, to file any outstanding 2019 claims. This accounts for the 60 days of the claims grace period before the “outbreak period,” and 30 days after it ends.
An employer offers a Health FSA with a $500 carry-over period. In addition to the automatic “outbreak period” relief, the plan sponsor opts for the new claims period relief allowed by Notice 2020-29.
An employer with a July 1 renewal date offers employees a health FSA with a $500 carry-over limit. Typically, the employees would have until June 30, 2020, to submit qualified medical expenses from July 1, 2019-June 30, 2020, for reimbursement. However, due to workplace complications caused by COVID-19, this employer plan decides to use the IRS Notice 2020-29 relief to extend the claims period for the 2020 plan year by six additional months. The participants in this plan also get claims submission relief during the "outbreak period" due to the new regulation. The "outbreak period" ends on August 1, 2020. The employees in this plan have until December 31, 2020, to incur and submit 2019-2020 plan year claims for their health FSA, since the "outbreak period" must be disregarded for claims submission purposes and the employer opted to extend their claims period using the Notice 2020-29 relief until December 31, 2020.
An employer offers a Health FSA with a 90-day claims processing grace period. In addition to the automatic “outbreak period” relief, the plan sponsor opts for the new claims period relief allowed by Notice 2020-29.
An employer with a January 1 renewal date offers employees a health FSA with a 90-day claims processing grace period. Typically, the employees would have until March 31, 2020, to submit qualified medical expenses from January 1, 2019-December 31, 2020, for reimbursement. However, due to workplace complications caused by COVID-19, this employer plan decides to use the IRS Notice 2020-29 relief to extend the claims period for the 2020 plan year by six additional months. The participants in this plan also get claims submission relief during the "outbreak period" due to the new regulation. The "outbreak period" ends on August 1, 2020. The employees in this plan have until May 31, 2020, to incur and submit 2019-2020 plan year claims for their health FSA. Additionally, since the "outbreak period" must be disregarded for claims submission purposes, the employees in this plan have until October 30, 2020 to submit claims incurred between January 1, 2019- May 31, 2020 for reimbursement.
Employers considering adopting all or some of the relief outlined in these notices need to make sure they focus on employee communications when implementing any plan changes. Bottom line, friends, this stuff is complicated. Employers must understand their options. It is also vital that employees understand what, if any, new choices are available to them and what the parameters of those choices might be.
If you have any questions about all of this, feel free to drop us a line. We'd be happy to try and help you out. Or, if you need to pop open the official beverage of the coronacrisis when you think about it, know you are not alone!