Long-Awaited IRS Guidance Provides Mid-Year Election Flexibility And Other Health Plan ReliefMay 13, 2020
As employers continue to receive questions from employees about the state of their benefits during COVID-19, there have been an increasing number of requests from employees relating to their elections under health plans. For example, due to current circumstances, employees may feel the need to elect to enroll in or change current medical coverage, to increase or decrease amounts contributed to Health Flexible Spending Accounts (“Health FSAs”) due to medical bills, or to increase or decrease amounts contributed to Dependent Care Flexible Spending Accounts (“Dependent Care FSAs”) due to school and care facility closures. As a result, the Internal Revenue Service (“IRS”) recently released Notices 2020-29 and 2020-33 detailing specific changes to address these issues.
Mid-Year Elections. Generally, elections made by employees during open enrollment are irrevocable during the plan year unless an exception applies. In light of the ongoing COVID-19 pandemic, the new IRS guidance allows employers to permit their employees to make the following mid-year election changes in 2020:
- Employer Sponsored Coverage. Employer-sponsored plans may allow eligible employees to take the following action on a prospective basis:
- Elect to enroll in coverage if they initially declined coverage;
- Elect to drop their current coverage election and instead enroll in different coverage offered by their employer (including a change in election from self-only coverage to family coverage); and
- Elect to drop their current coverage election and instead enroll in coverage not offered by their employer (e.g., a spouse’s coverage), as long as the employee attests in writing that the employee is enrolled or will enroll in other health coverage not sponsored by the employer.
- Health FSAs and Dependent Care FSAs. Employer-sponsored plans that offer Health FSAs and/or Dependent Care FSAs may allow eligible employees to take the following action on a prospective basis:
- Revoke an election;
- Make a new election; or
- Decrease or increase an existing election.
Employers may, at their discretion, choose to limit election changes to those which will increase an employee’s coverage, such as requiring an election to be made from self-only coverage to family coverage. Elections by employees do not need to be allowed in unlimited amounts, but instead are left to the employers’ discretion provided the changes are nondiscriminatory and are in compliance with other applicable laws, including ERISA notice requirements. If an employer wants to allow for these changes, the plan must be amended by December 31, 2021. The amendment to the plan may be effective as of January 1, 2020.
Unused Health FSA and Dependent Care FSA Funds. The IRS guidance also provides more flexibility for employees to apply unused funds from a Health FSA or a Dependent Care FSA to expenses incurred through December 31, 2020. Employers can allow an employee to take the unused funds from the previous plan year’s Health FSA or Dependent Care FSA and cover costs incurred through December 31, 2020. For example, if an employer has a cafeteria plan with a grace period that ends on March 15, 2020 and the employee has unused funds remaining in their Health FSA, those funds can be extended to cover costs that are incurred up through December 31, 2020. However, the restrictions on contributing to a Health Savings Account (“HSA”) will continue to apply, meaning an individual who has unused amounts remaining at the end of a plan year or grace period ending in 2020 and who is allowed an extended period to incur expenses under a Health FSA will generally not be eligible to contribute to an HSA during the extended period. Plan amendments to incorporate this relief must be adopted by December 31, 2021 if an employer wishes to permit the provision.
Increased Carryover for Health FSAs. The IRS increased the amount that an employee can carry over from one plan year to the next under a Health FSA from $500 to $550 beginning in 2020, and also announced that the carryover limit will now be adjusted annually for inflation.
Clarification Regarding High Deductible Health Plans. In March, the IRS released IRS Notice 2020-15 allowing employers to waive all costs for health benefits associated with testing for and treatment of COVID-19 without violating the minimum deductible requirements for a high deductible health plan (“HDHP”). Under the new guidance, the IRS clarified that any relief provided to employees under Notice 2020-15 regarding HDHPs and COVID-19 testing expenses will apply with respect to reimbursements of expenses incurred on or after January 1, 2020. The notice clarifies that a panel of diagnostic testing for Influenza A & B, norovirus and other coronaviruses, and respiratory syncytial virus (RSV) and any items or services required to be covered with a zero cost sharing, as provided by the CARES Act, are part of testing and treatment for COVID-19. If employees were enrolled in an HDHP and received testing and treatment for COVID-19 (including telehealth services) at no cost any time on or after January 1, 2020, they are not disqualified from contributing to an HSA.
Individual Coverage HRAs. Under the general rule, an Individual Coverage Health Reimbursement Arrangement (“Individual Coverage HRA”) cannot reimburse any medical expenses incurred before the beginning of the plan year and still qualify for exclusion from income and wages. This notice clarifies that for Individual Coverage HRAs, a Plan is permitted to treat a health insurance premium expense as incurred on (1) the first day of each month of coverage on a pro rata basis, (2) the first day of the period of coverage, or (3) the date the premium is paid. In other words, Individual Coverage HRAs may reimburse a substantiated premium for individual health insurance even if the covered individual paid the premium for the coverage prior to the first day of the plan year.
If you have any questions about the new guidance or other COVID-19 relief or would like us to prepare plan amendments and related forms, please reach out to a member of McGrath North’s COVID-19 Response Team or Employee Benefits Team for additional information and guidance.
Contact information for the complete McGrath North’s COVID-19 Response Team can be found here.
For information regarding additional business-related concerns centered around COVID-19, please visit our COVID-19 Resource Guide here.