On May 12, 2020, the Internal Revenue Service (“IRS”) published Notices 2020-29 and 2020-33. Notice 2020-29 is the latest installment in COVID-19 relief guidance targeted at health and welfare benefits. The Notice enables employers to provide flexibility to employees to modify their health coverage and flexible spending account (“FSA”) elections and gives employees until the end of 2020 (but not 2021) to use certain FSA amounts that may otherwise be forfeited. Unlike certain COVID-19 relief related to retirement plans, employers may make the relief under Notice 2020-29 available to all participants, regardless of whether they have suffered a COVID-19-related loss.
Notice 2020-33 allows employers to adopt an indexed maximum carryover amount for health FSAs, beginning with amounts that may be carried over from the 2020 plan year to the 2021 plan year.
Midyear Changes to Health Coverage and Flexible Spending Account Elections
Under Notice 2020-29, employers may amend their Code § 125 cafeteria plans to permit the following midyear health coverage election changes in calendar year 2020:
- Initial elections of employer-sponsored health coverage. A plan may permit employees who initially declined employer-sponsored health coverage to make an initial election for employer-sponsored health coverage.
- Modification of employer-sponsored health coverage elections. A plan may permit employees to revoke their current health coverage election and instead elect different health coverage sponsored by the same employer. This includes making changes to the level of coverage, for example by changing from self-only to family coverage, as well as changes to the plan under which coverage is elected, for example by changing from a plan that covers only in-network expenses to a plan that also covers out-of-network expenses.
- Revocation of employer-sponsored health coverage elections. A plan may also permit employees to revoke a health coverage election and not elect different health coverage sponsored by the same employer. However, a plan may only permit such revocations if the employee making the revocation attests in writing that he or she has enrolled, or immediately will enroll, in comprehensive health coverage not sponsored by the same employer, such as Medicare or Medicaid, health insurance purchased on an exchange, or employer-sponsored health coverage sponsored by the revoking employee’s spouse or parent.
Employers may also amend their plans to allow the following midyear election changes to health FSAs (including limited purpose health FSAs) and dependent care FSAs:
- Revoke an existing election.
- Make a new election.
- Increase an existing election.
- Decrease an existing election.
Employers may adopt some or all of the provisions listed above for health coverage and FSAs, and may impose limitations on the election changes, provided that the limitations do not result in a failure to comply with nondiscrimination rules applicable to cafeteria plans. For example, employers may choose to limit the number of times they allow employees to change their elections or permit only midyear election changes that result in an increased benefit, such as a change from self-only coverage to family coverage, or from a low-coverage plan to a high-coverage plan; or they may limit midyear FSA elections to amounts not less than the amount already reimbursed for the plan year.
Extended Period to Apply Unused FSA Amounts to Expenses Incurred Through December 31, 2020
Under Notice 2020-29, employers may amend their plans to allow employees to apply FSA amounts that remain unused at the end of a plan year that ends in 2020 or grace period that ends in 2020 to reimbursements for qualifying expenses incurred through December 31, 2020 (a “temporary extension period”).
- For example, if a calendar year plan has a grace period allowing unused amounts from the 2019 plan year to be applied to expenses incurred through March 15, 2020, an employer may elect to allow those unused amounts to be applied to expenses incurred through December 31, 2020.
- This relief is not helpful for calendar year FSAs that do not already have a grace period for the 2019 plan year, however, because FSAs that do not already have a grace period for the 2019 plan year may not add one retroactively. For example, the relief does not relax any requirements for a calendar year plan that allows a carryover (as opposed to a grace period) for the 2019 plan year, because the 2019 plan year ended before 2020. In other words, a calendar year health FSA with a carryover may allow up to $500 to be used through the end of 2020, as it already could have allowed without Notice 2020-29, but it may not allow any other unused amounts (e., amounts in excess of $500) from 2019 to be used through the end of 2020.
- A health FSA with a fiscal plan year ending in 2020 that allows a carryover may adopt the temporary extension period through December 31, 2020, notwithstanding other IRS guidance that prohibits health FSAs from allowing both grace periods and carryovers.
Important caveat: A temporary extension period to use unused health FSA amounts may cause employees to be ineligible for participation in a health savings account (“HSA”) because coverage under a health FSA (other than a limited purpose health FSA) is coverage under a plan that is not a high deductible health plan. Therefore, employees who have unused health FSA (not including limited purpose health FSA) amounts remaining when a plan year or grace period ends in 2020, and who are permitted to use those amounts under the health FSA through December 31, 2020, would not be eligible to contribute to an HSA during the temporary extension period. If the employee’s health FSA is a limited purpose health FSA, however, it is HSA-compatible and the temporary extension period will not interfere with the employee’s ability to contribute to the HSA.
The temporary extension period applies on or after January 1, 2020 and on or before December 31, 2020 (e.g., to a grace period that expired on March 15, 2020).
Plan Amendments and Other Next Steps
Employers wishing to implement any of the provisions relating to midyear elections or increased time to apply unused FSA amounts must amend their plans by December 31, 2021. Amendments may be retroactive to January 1, 2020, provided that the employer informs employees of the change and operates the plan in accordance with the amendment. The guidance does not include a specific deadline for providing notice. With regard to amendments implementing midyear elections, if, prior to May 12, 2020, the cafeteria plan permitted midyear election changes under the relaxed rules of the Notice, the relief will apply to any such election changes made on or after January 1, 2020.
Employers interested in implementing these changes should consult with the plan’s third-party administrator and insurer to determine if, how, and when the insurer or third-party administrator can implement the changes.
Increased and Indexed Health FSA Carryover Amounts
Under Notice 2020-33, employers may amend their plans to index the maximum amount of unused health FSA funds that may be carried over to the next plan year. The amendment can apply to carryovers from the 2020 and subsequent plan years. Amounts would be indexed to 20% of the maximum health FSA salary reduction contribution for a given plan year. This amount is set under section 125(i) of the Internal Revenue Code (at $2,500), which is indexed for inflation. For 2020, this indexed amount is $2,750, so the indexed carryover amount for 2020 that may be carried over to the subsequent 2021 plan year is $550.
Employers wishing to implement indexing of maximum carryover amounts must amend their plans prior to the end of the plan year from which the increased amount will be carried over. For example, if the employer wishes to implement this provision for the 2021 plan year, the amendment must be adopted before the end of the 2021 plan year. However, an amendment that adopts indexed increases for the 2020 plan year may be adopted by December 31, 2021, so long as the employer informs all eligible employees of the change and operates the plan in accordance with the amendment.
Clarifications on COVID-19 Relief for High Deductible Health Plans
Previous IRS Notice 2020-15 provides that a plan that otherwise satisfies high deductible health plan (“HDHP”) rules does not fail to be an HDHP solely because it provides for pre-deductible medical care services and items related to testing for and treatment of COVID-19. Notice 2020-29 clarifies that the relief under Notice 2020-15 is retroactive with respect to reimbursements for expenses incurred on or after January 1, 2020. Further, diagnostic tests for influenza A & B, norovirus and other coronaviruses, and respiratory syncytial virus, as well as any other services or items that must be provided without cost sharing under section 6001 of the Families First Coronavirus Response Act, as amended, are within Notice 2020-15’s scope of testing for and treatment of COVID-19.
Section 3701 of the Coronavirus Aid, Relief, and Economic Security Act allows HDHPs to cover telehealth and remote care services without a deductible, or with a deductible below the otherwise applicable amount, without preventing participants from contributing to a health savings account. The statutory provision was effective March 27, 2020, with respect to plan years beginning on or before December 31, 2021. Notice 2020-29 clarifies that this provision applies retroactively to services provided on or after January 1, 2020, with respect to plan years beginning on or before December 31, 2021.