IRS Allows More Election Changes, Modifies FSA Rules
Prompted by the COVID-19 pandemic, the IRS has issued more guidance addressing cafeteria plan election changes, flexible spending accounts (FSAs) and Health Savings Accounts (HSA). The guidance attempts to clarify and address questions stemming from prior legislative and regulatory actions. The temporary relief applies to 2020 activity only.
Under this guidance employers may, but are not required to, allow:
- Greater flexibility to change cafeteria plan elections. The IRS is temporarily permitting prospective mid-year election changes without a change in status or other IRS-recognized event. The permitted changes include new health coverage elections, revoking a current health coverage election (attestation of other health coverage may be required), switching health coverage options or adding family members, and changes to health and dependent care FSA elections. The ability to prospectively revoke or decrease an employee’s health and dependent care FSA elections is particularly noteworthy given state restrictions on elective medical services and the cancellation of childcare programs.
- More time to incur FSA claims. The IRS has temporarily softened the “use-or-lose” rule by allowing health and dependent care FSA participants to use account balances at the end of a grace period, or plan year (with or without a carryover feature) ending in 2020, to pay for expenses incurred through December 31, 2020. For example, a grace period ending on March 15, 2020 can now extend to December 31, 2020. However, participants with general-purpose health FSA coverage during the extension period will not be HSA eligible.
The IRS also clarified that prior COVID-19 relief regarding HSA eligibility and pre-deductible coverage for COVID-19 testing and treatment and telehealth services is effective retroactively to January 1, 2020.
The permanent guidance increases the health FSA carryover limit to 20% of the salary reduction contribution limit (indexed for inflation). For plan years starting in 2020, carryovers to the 2021 plan year may increase from $500 to $550 (20% of the 2020 contribution limit of $2,750).
Employer health plans should notify plan participants of any temporary plan changes they choose to adopt. Plan amendments for any of the above changes are required by December 31, 2021, and may be applied retroactively to January 1, 2020.
If you have questions, please reach out to your Mercer consultant. A detailed GRIST analysis of this guidance will soon be on our Law & Policy page.