Recent IRS Notices Allow Certain Changes to Health Plans, Health FSAs and Dependent Care Assistance Program FSAs 

Earlier this week, the Internal Revenue Service issued two notices (2020-29 and 2020-33) that allow Section 125 Plans (“Cafeteria Plans”) to permit certain additional mid-year election changes for health plans, Health FSAs (including limited purpose FSAs), and Dependent Care Assistance Program FSAs (“DCAPs”). The notices also permit an increase in the amount eligible for rollover (or carryover) under a Health FSA (including limited purpose FSAs), and a special grace period for claims incurred through the end of 2020 for both DCAPs and Health FSAs. Finally, the IRS clarified that previously communicated changes allowing high deductible health plans (“HDHPs”) to cover telehealth services and expenses related to COVID-19 before applying the deductible may be applied retroactively to January 1, 2020.

These IRS notices do not require employers to adopt these changes but permit significant flexibility in response to the COVID-19 Public Health Emergency (PHE). This flexibility is not limited to individuals affected by the pandemic. Employers should think carefully, in consultation with their broker(s) and/or MedCost Account Manager, before adopting any of these changes due to the potential for significant downstream impacts. These optional changes are described in further detail below.

Health Plan Changes

• For calendar year 2020 (only), employees may be permitted to:
  • 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; or
  • Revoke an existing election, provided that the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer. (A sample written attestation is included in Notice 20-29, page 8.)
• These options for election changes only apply to group health plans and only for changes elected on a prospective basis (i.e., not retroactively). An employer is not required to provide unlimited election changes and may determine the extent to which such election changes are permitted, so long as any applicable requirements comply with the nondiscrimination rules for cafeteria plans.
• There is a real possibility of adverse selection with permitting these election changes (e.g., an employee who realizes they are likely to incur significant medical expenses may decide to enroll in the plan for the first time or decide to switch from a HDHP to a more traditional offering). As such, before implementing new election change options, MedCost advises employers to carefully consider the impact in consultation with their broker(s) and/or MedCost Account Manager.
• If an employer desires to implement these election changes:
  • The applicable Cafeteria Plan document must be amended to support the change.
  • The health plan’s SPD must be amended to reflect the change. Such amendments will be subject to stop loss approval. We anticipate some carriers may require specific plan language or even premium increases to offset the adverse selection issue noted above.
  • Employers must also inform all employees eligible to participate in the Cafeteria Plan of the changes to the plan.

Health FSA and Dependent Care Assistance Program FSA Changes

• Election Changes. For calendar year 2020 (only), employees may be permitted to:
  • Revoke an election;
  • Make a new election; or
  • Decrease or increase an existing election.

These election change options apply to both Health FSAs (including limited purpose FSAs) and DCAPs and only for changes elected on a prospective basis (i.e., not retroactively). An employer is not required to provide unlimited election changes and may determine the extent to which such election changes are permitted and applied, so long as any applicable requirements comply with the nondiscrimination rules. If an employer desires to implement these election changes, the applicable Cafeteria Plan document must be amended to support the change. Employers must also inform all employees eligible to participate in the Cafeteria Plan of the changes to the plan.

• Rollover and Grace Period Changes.
  • Rollover. For health FSAs (including limited purpose FSAs) that include a rollover (or carryover) provision, the amount eligible for rollover in a typical year is increased to $550.
    • If an employer desires to implement this change, an amendment to the Cafeteria Plan will be required in many cases, unless the plan document explicitly specifies the amount eligible for rollover by reference to ‘the amount permitted by the IRS.’ This change may take effect for plan years currently in progress, so long as any required plan amendment is signed before the plan year ends.
    • Employers must also inform all employees eligible to participate in the Cafeteria Plan of the changes to the plan.
  • “Special” Grace Period. Any amount remaining in a health FSA (including limited purpose FSAs) or DCAP as of the end of a plan year that ends in 2020 (or a grace period that ends in 2020, if applicable) may be used to pay or reimburse medical care expenses or dependent care expenses, respectively, incurred through December 31, 2020.
    • This special grace period option is available to plans that provide for rollover (while the traditional grace period option is not).
    • If an employer desires to implement this change, an amendment to the Cafeteria Plan document is required. Employers must also inform all employees eligible to participate in the Cafeteria Plan of the changes to the plan.
    • As always, an individual cannot contribute to an HSA during any time period in which the employee may incur expenses that could be covered by a Health FSA (even if the Health FSA balance has been exhausted), unless it is a limited purpose FSA. For purposes of the special grace period described above, the relevant period ends on December 31, 2020.  

Update to Permitted HDHP Changes (now retroactive to January 1, 2020)

• Pursuant to previous IRS guidance and the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), both effective in March 2020, we previously informed you that:  
  • HDHPs are permitted to cover COVID-19 treatment (in person and, if covered, virtual) before the deductible is met.
  • HDHPs may (but are not required to) pay for telehealth services before the deductible is met. Such coverage may be broader than COVID-19.

The IRS has now clarified that such coverage is permitted retroactive to January 1, 2020. If an employer desires to make such a change retroactive to January 1, 2020, the health plan’s SPD must be amended. Such amendments will be subject to stop loss approval.

Implementation with MedCost 

As a reminder, all the changes listed above are optional and should be considered carefully. Please contact your Account Manager if you are considering making any of these changes.

For plans that decide to make any of these changes, MedCost’s compliance department is prepared to draft any necessary health plan SPD amendments upon request. If MedCost is administering an FSA or DCAP for the employer, MedCost will also assist with any required Cafeteria Plan changes. If MedCost is not administering an FSA or DCAP for the employer, MedCost’s compliance department is unable to assist with Cafeteria Plan changes. In such cases, employers should contact their broker(s) or legal counsel for further assistance. Your Account Manager can also assist with a referral to outside legal counsel, if needed.

While this information is considered to be true and correct at the time of publication, changes in circumstances may affect its accuracy. Visit the COVID-19 resource page for up-to-date information.