changes to section 125 cafeteria plans

Changes to Section 125 Cafeteria Plans May 2020

The IRS has just released two new sets of rules impacting Section 125 Cafeteria Plans.  Notice 2020-33 provides permanent rule changes and  Notice 2020-29 provides temporary rule changes. The relief provided under each notice is totally optional for employers. Employers who choose to take advantage of any of the offered plan options will be required to notify all eligible employees and will be required to execute written plan amendments by December 31, 2021.

Notice 2020-33

  • Permanent rule change
  • Modifies the amount of annual rollover of unused benefits that Health FSA plans may offer to Plan participants.  The increased maximum rollover amount allowable will be $550 for the 2020 Plan Year. The maximum in future years is indexed based on the annual maximum FSA contribution.
  • The notice provides that the increased rollover amount may apply to Plan Years beginning on or after January 1, 2020.
  • You will be required to execute a written plan amendment for this change if you choose to make this adjustment to your Health Care FSA.

Notice 2020-29

  • Temporary rule changes for the calendar year 2020 only
  • First, the IRS introduces several significant exceptions to the mid-year change of election rules generally applicable to Section 125 Cafeteria Plans.
  • If you choose to make the following temporary election changes to your health plan coverage, you must secure approval from your health insurance carrier.  You do not have to conduct a formal open enrollment period, but you must notify all eligible participants of the election options.
  • The temporary exceptions to mid-year participant election change rules for 2020authorize employers to allow employees who are eligible to participate in a Section 125 Cafeteria Plan to:
    • make a new election to participate in employer-sponsored group health plan coverage if the employee originally declined coverage at open enrollment;
  • change coverage options previously elected during open enrollment;
  • drop group coverage for covered family members or themselves if they will be replacing the coverage for the impacted individual immediately with other coverage (a written attestation to revoke such coverage will be required from the employee noting that the employee will have health coverage in which to enroll);
  • make a prospective election to add, change or drop a Health FSA election; and,
  • make a prospective election to add, change or drop a DCAP election.

None of the above elections require a specific impact from the coronavirus pandemic for the employee.

  • For allowable Health FSA or Day Care election changes, employers may limit the amount of any election reduction to the amount previously reimbursed by the plan.
  • Even though new elections to Health FSA and Day Care FSA contributions may not be retroactive, Notice 2020-29 provides that amounts contributed to a Health FSA after a revised mid-year election may be used for any medical expense incurred during the first Plan Year that begins on or after January 1, 2020.
  • The special grace period introduced in Notice 2020-29 allows all Health FSAs and Day Care FSAa with a grace period or Plan Year ending during the calendar year 2020 to allow otherwise eligible expenses to be incurred by Plan Participants until as late as December 31, 2020.
  • This temporary change will provide relief to non-calendar year based plans.  Based on the rules of this special grace period, calendar year Health FSA plans that offer rollovers of unused benefits will not benefit.

The notice raises one issue for employers to consider before amending their plan to offer the special grace period.  The special grace period will adversely affect the HSA contribution eligibility of individuals with unused Health FSA benefits at the end of the standard grace period or Plan Year for which a special grace period is offered.  This will be of particular importance for employers with employees who may be transitioning into an HDHP group health plan for the first time at open enrollment.

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