IRS Allows Mid-Year Changes to Cafeteria Plans in Response to Coronavirus
Author: Michael Cardman, XpertHR Legal Editor
May 18, 2020
As a result of the coronavirus (COVID-19) pandemic, the Internal Revenue Service (IRS) has issued new guidance (Notice 2020-29) relaxing the usual restrictions on mid-year cafeteria plan elections.
Under a cafeteria plan, an employer offers employees a choice, much like a menu, of benefits that are either in the form of taxable cash compensation or tax-free (qualified) benefits like a 401(k) plan, health coverage and health savings account (HSA) contributions.
Generally, employees' elections for cafeteria plan benefits must be made before the first day of the plan year and be irrevocable. Federal regulations allow employees to make new elections in the middle of a plan year only if they undergo a change in status (such as marriage or the birth of a child) or if there are significant changes in the cost of coverage.
But now the IRS is allowing employers to decide if they want to let employees make mid-year elections for health coverage, health flexible spending accounts (FSAs) and dependent care assistance programs to help their employees respond to changes in their medical needs resulting from the COVID-19 pandemic.
For employer-sponsored health coverage, employers may now allow employees to:
- Make a new election on a prospective basis if they initially declined coverage;
- Enroll in different health coverage sponsored by the same employer on a prospective basis if they already elected for coverage; or
- Revoke an existing election on a prospective basis as long as they attest in writing that they are enrolled, or immediately will enroll, in other health coverage not sponsored by the employer.
Employers also may opt to let employees:
- On a prospective basis revoke an election, make a new election, or decrease or increase an existing election applicable to a health FSA or to dependent care assistance program; and
- Extend through December 31, 2020, the claims periods for taxpayers to apply unused amounts remaining in a health FSA or dependent care assistance program for expenses incurred for those same qualified benefits.
Additionally, the IRS issued Notice 2020-33, which increases the limit for unused health FSA carryover amounts remaining at the end of a plan year to $550 (up from $500). Such "carryover" amounts can be used to pay or reimburse a participant for medical care expenses incurred during the following plan year.