Regulatory Resources

COVID-19 IRS Notices

On May 12, the U.S. Treasury Department and the Internal Revenue Service (IRS) issued two notices that provide additional flexibility for employers with respect to cafeteria plans, health flexible spending arrangements (health FSAs), and dependent care flexible spending arrangements (dependent care FSAs):

Notice 2020-29
The guidance in this notice is specific to the COVID-19 pandemic.

  • Provides increased flexibility for cafeteria plans, health plans, health FSAs, and dependent care FSAs
  • Clarifies some COVID-19 related provisions related to health savings account (HSA)-eligible high deductible health plans (HDHPs)

 

Notice 2020-33
The guidance in this notice is not specific to the COVID-19 pandemic.

  • Modifies the permissive carryover rule for health FSAs
  • Clarifies reimbursements of premiums by individual coverage health reimbursement arrangements (individual coverage HRAs)

 

Notice 2020-29: COVID-19-related Guidance

Cafeteria Plan Mid-Year Election Changes
Under the current cafeteria plan rules – which apply to salary reduction elections for employer-sponsored health coverage, health FSAs, and dependent care FSAs – participants’ elections generally are irrevocable and must be made prior to the first day of the plan year, except in certain circumstances as set out in the current cafeteria plans regulations (e.g., employee change in status).

Notice 2020-29 provides temporary flexibility for cafeteria plans to permit employees to make certain prospective mid-year election changes during calendar year 2020, regardless of whether the basis for the election change satisfies the criteria set forth in the current regulations. Specifically, an employer may amend its cafeteria plans to allow eligible employees to make prospective election changes during calendar year 2020 as follows:

  • With respect to employer-sponsored health coverage, an employer may allow an employee to do any of the following on a prospective basis:
    • Make a new election if the employee initially declined to elect employer-sponsored health coverage
    • Revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer (including changing from self-only to family coverage)
    • Revoke an existing election, provided that the employee attests in writing that the employee is enrolled, or immediately will enroll, in other “comprehensive” health coverage not sponsored by the employer. The notice provides optional model language that can be used for the attestation.
  • With respect to a health FSA, an employer may allow an employee to revoke an election, make a new election, or decrease or increase an existing election.
  • With respect to a dependent care FSA, an employer may allow an employee to revoke an election, make a new election, or decrease or increase an existing election.

 

Whether to allow these changes is at the discretion of the employer. If an employer decides to amend its cafeteria plan(s) to provide this flexibility, the notice provides that the employer may limit the period during which the election changes may be made and is not required to provide unlimited election changes.

However, the employer may, in its discretion, determine the extent to which such election changes are permitted and applied, provided any permitted election changes are applied on a prospective basis only, and the changes do not result in failure to comply with the nondiscrimination rules applicable to cafeteria plans.

Treasury and the IRS also note that in determining the extent to which election changes are permitted and applied, an employer may wish to consider the potential for adverse selection and that, for health FSAs and dependent care FSAs, employers are permitted to limit mid-year elections to amounts not less than already reimbursed. The notice also includes a reminder that changes to the plan may implicate other laws, such as notice requirements under ERISA.

The relief may be applied retroactively to periods prior to the issuance of the notice and on or after January 1, 2020 to address a §125 cafeteria plan that, prior to the issuance of the Notice, permitted mid-year election changes for employer-sponsored health coverage, health FSAs, or dependent care assistance programs that otherwise are consistent with the requirements for the relief provided in the Notice.

Health FSA and Dependent Care FSA Unused Amounts
Under existing rules, an employee’s unused balance remaining in a health FSA or dependent care FSA at the end of the plan year generally must be forfeited unless:

  • For a health FSA, the employer allows a carryover (currently $550 per Notice 2020-33)
  • For a health FSA or dependent care FSA, the employer allows a grace period (under which a participant may apply unused amounts to pay expenses incurred during a period of up to 2 months and 15 days into the next plan year)

 

Under current rules, an employer cannot allow a health FSA to provide both a carryover and a grace period.

Notice 2020-29 provides an extended period to apply unused amounts remaining in a health FSA or dependent care FSA. Specifically, Notice 2020-29 provides that an employer, in its discretion, may amend one or more of its cafeteria plans to permit employees to apply unused amounts remaining in a health FSA or dependent care FSA as of the end of a grace period ending in 2020 or plan year ending in 2020 to pay or reimburse expenses incurred through December 31, 2020. However, health FSA amounts may only be used for medical care expenses, and dependent care assistance FSAs may only be used for dependent care expenses.

This extension of time for incurring claims is available both to a cafeteria plan that has a grace period and a plan that provides for carryover. Although not explicitly stated in the notice, it also appears to apply to a health FSA or dependent care FSA that does not provide either a carryover or a grace period.

Further, the notice provides that an individual who had 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 per the Notice, will not be eligible to contribute to an HSA during that extended period, except in the case of an HSA-compatible health FSA.

The extended grace period provision 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). 

Please see the Notice for helpful examples.

Plan Amendments
The notice provides that an employer must adopt a plan amendment if it wishes to provide either the mid-year election cafeteria plan change flexibility or the extended period for unused amounts for a health FSA or dependent care FSA, each as described above.

However, the amendment for the 2020 plan year need not be adopted until December 31, 2021, and may be effective retroactively to January 1, 2020, provided the cafeteria plan operates in accordance with the Notice and the employer informs all employees eligible to participate in the cafeteria plan of the changes to the plan.

HDHPs
Notice 2020-29 also clarifies the following for HSA-eligible HDHPs.

  • Notice 2020-15, which provided that, until further guidance, HDHPs may cover COVID-19 testing and treatment prior to the satisfaction of the annual minimum deductible applies with respect to reimbursements of expenses incurred on or after January 1, 2020.
  • Testing and treatment of COVID-19, for purposes of Notice 2020-15, includes “the 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 zero cost sharing” under the Families First Act, as amended by the CARES Act.
  • The treatment of telehealth and other remote care services under Section 3701 of the CARES Act applies with respect to services provided on or after January 1, 2020, with respect to plan years beginning on or before December 31, 2021. 

 

Section 3701 of the CARES Act, which was effective March 27, 2020, allows individuals to retain eligibility to contribute to an HSA if they also receive coverage for telehealth and remote care services outside an HDHP and allows for HDHPs to retain their qualified status, even if coverage of telehealth and remote care services is provided before the minimum deducible is met.

Notice 2020-33: Ongoing Guidance

Health FSA Carryovers
As noted above in the information regarding Notice 2020-29, an employer may elect to allow a health FSA to provide for a carryover. Notice 2020-33 increases the maximum $500 carryover amount to $550 for a plan year starting in 2020 to be carried over to the immediately following plan year beginning in 2021.

The Notice provides that for an employer that wishes to allow this increased carryover amount, the plan must be amended. In general, this amendment must be adopted on or before the last day of the plan year from which amounts may be carried over and may be effective retroactively to the first day of the plan year, provided the plan operates in accordance with the guidance under the notice and informs all employees eligible to participate in the plan of the carryover provision. However, for 2020, the amendment must be adopted by December 31, 2021.

Unlike Notice 2020-29, this guidance is not time limited or related to COVID-19 and will apply indefinitely. Although the additional carryover amount is not significant, the ability to carryover additional amounts could be helpful to participants due to the COVID-19 crisis.

Individual Coverage HRAs
Notice 2020-33 also provides clarification intended “to assist with the implementation of individual coverage health reimbursement arrangements (individual coverage HRAs),” which are HRAs under which employers may provide contributions for employees to use to purchase coverage in the individual health insurance market or Medicare. 

The notice explains:

  • Only payment or reimbursement for medical care expenses incurred by an employee during a plan year is excludable from wages and income.
  • Medical care expenses are generally treated as incurred when a covered individual is provided medical care that gives rise to the expense, not when the amount is billed or paid.

 

However, Treasury and the IRS acknowledge that this raises administrative issues for an individual coverage HRA, to the extent that a participant must pay, prior to the first day of a plan year, all or part of the premium for individual health insurance coverage or Medicare during that plan year.

Accordingly, Notice 2020-33 provides that a plan may treat an expense for a premium for health insurance 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
  3. The date the premium is paid

 

Thus, an individual coverage HRA with a calendar year plan year may immediately reimburse a substantiated premium for health insurance coverage that begins on January 1 of that plan year, even if the covered individual paid the premium for the coverage prior to the first day of the plan year.