Locke Lord QuickStudy: New Cafeteria Plan and Flexible Spending Account Guidance Allows Employers to ‎Accommodate Employees’ Unanticipated Needs Due to COVID-19‎

Locke Lord LLP
May 18, 2020

As employers and employees adjust to the changes caused by this unprecedented global pandemic, preserving access to and protecting elections under group health and welfare plans are hot topics on many minds. To further assist with the nation’s response to the COVID-19 pandemic, the Internal Revenue Service (“IRS”) released Notices 2020-29 and 2020-33.  

Notice 2020-29 provides increased flexibility for election changes under a cafeteria plan under Section 125 of the Internal Revenue Code of 1986, as amended (the “Code”), related to employer-sponsored health coverage, health flexible spending accounts (“FSAs”), and dependent care assistance programs during 2020, and expands the period to apply unused amounts in a health FSA or dependent care assistance program. Notice 2020-33 increases the amount that may be carried over under a health FSA. These changes are optional and require plan amendments.

Temporary Relief to Make Mid-Year Elections under a Cafeteria Plan During 2020

Generally, elections regarding qualified benefits under a Code Section 125 cafeteria plan must be must be made prior to the first day of the plan year and must be irrevocable. Regulations under Code Section 125 provide that a cafeteria plan may permit an employee to revoke an election during a period of coverage and make a new election under certain limited circumstances, such as if the employee experiences a change in status or there are significant changes in the cost of coverage.

Due to the nature of the public health emergency posed by COVID-19 and in recognition of employers’ willingness to accommodate their employees’ unanticipated changes in the need for medical care or dependent care services, Notice 2020-29 provides that a cafeteria plan may permit eligible employees to make the following changes–  

  • Employer-sponsored health coverage:
    • Make a new election on a prospective basis, 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 on a prospective basis; and
    • Revoke an existing election on a prospective basis, provided that the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer1
  • With respect to FSAs and Dependent Care Assistance Programs:  revoke an election, make a new election, or decrease or increase an existing election applicable to a FSA or dependent care assistance program on a prospective basis.

If permitted by the employer, these limited-time election changes may be made regardless of whether the basis for the election change satisfies the general criteria set forth in Treasury Regulation 1.125-4. Election changes under this relief generally are required to be applied on a prospective basis only. An employer, however, may provide for election changes retroactively to periods prior to the publication of the Notice and on or after January 1, 2020, provided the cafeteria plan already permitted mid-year election changes for employer-sponsored health coverage, FSAs, or dependent care assistance programs that otherwise are consistent with the requirements of the Notice. 

It is important to note that the above relief is optional. Whether to allow these changes is at the discretion of the employer. If an employer decides to amend its cafeteria plan to provide this flexibility, the IRS provides that the employer may limit the period during which the election changes may be made, and is not required to allow unlimited election changes. For example, when determining the extent to which election changes will be permitted and applied, the Notice states that an employer might want to consider the potential for adverse selection of health coverage by its employees. In addition, with respect to FSAs and dependent care assistance programs, employers may limit mid-year elections to amounts no less than amounts already reimbursed.

Changes to a cafeteria plan that are allowed under Notice 2020-29 must also comply with any other applicable laws that may be implicated, such as notice requirements under the Employee Retirement Income Security Act of 1974, as amended.

Extended Claims Period for FSAs and Dependent Care Assistance Programs

Notice 2020-29 also provides flexibility for a Section 125 cafeteria plan to provide an extended period to apply unused amounts in an FSA or dependent care assistance program to pay or reimburse medical expenses or dependent care expenses.  

Normally, contributions to an FSA and dependent care assistance plans that are unused at the end of a coverage period are forfeited. Employers may, however, amend their plans to permit contributions from one year to be used for expenses incurred by March 15th of the following year (based on a calendar year coverage period).  

Under this new guidance, an employer may amend one or more of its Section 125 cafeteria plans to permit employees to apply unused amounts remaining in an FSA or dependent care assistance program after the grace period or plan year ending in 2020 that would otherwise be forfeited to pay or reimburse expenses incurred through December 31, 2020.  For a calendar year plan with a grace period ending on March 15, 2020, this means amounts from the 2019 plan year that would have otherwise been forfeited as of the end of the runout period can instead be used for the 2020 plan year to reimburse additional expenses incurred until December 31, 2020.  

Notice 2020-29 left unaddressed an issue that is impacting many employees – due to the COVID-19 pandemic, many daycares shut down and employees were forced to rely on family members to care for their children at their home, which is not a permitted expense for a dependent care assistance program. These employees are hoping to have leftover funds refunded at the end of calendar year 2020 (which is prohibited by Section 125) and not have these funds forfeited to the employer. While it is possible for many that this issue can be resolved once the stay-home orders lift (as long as they suspend their elections now and can utilize childcare services for a sufficient number of months later this year), this may not be the case for everyone.

This provision is optional and an employer must amend its Code Section 125 cafeteria plan to take advantage of this extended period.  The amendment must be adopted on or before December 31, 2021, and may be effective retroactively to January 1, 2020, provided that the cafeteria plan operates in accordance with the Notices, as applicable, and the employer informs all employees eligible to participate in the cafeteria plan of the changes to the plan.

Increase in FSA Carryover Amount

As an alternative to the permissive grace period described above, an employer’s cafeteria plan may be amended to allow up to $500 of unused FSA contributions from one coverage period to carry over to the next coverage period.  Notice 2020-33 permanently increases the carryover amount for FSAs from $500 to an inflation-adjusted number, indexing the carryover amount to 20% of the FSA contribution limit.  Future adjustments will be in $10 increments.  This adjustment applies to plan years beginning on and after January 1, 2020.  For the 2020 plan year, this means the maximum amount that may be carried over into 2021 will be $550 (20% of the $2,750 limit on salary reduction contributions).

A plan must be amended to reflect the inflation adjusted carryover amount.  Any amendment to incorporate this change for the 2021 plan year must be adopted at any time on or before the last day of the plan year that begins in 2021.  Further, if the plan permits, employees who, during 2020, wish to increase their FSA contributions or begin to make FSA contributions, as of the result of the increased carryover may change their elections.

Other Provisions

Notice 2020-29 clarifies that high deductible health plans (HDHPs) may provide coverage for expenses that were incurred on and after January 1, 2020 for the testing and treatment of COVID-19 without jeopardizing its status as an HDHP.  The Notice also clarifies that HDHP participants may receive coverage for telehealth and other remote services outside the HDHP effective on and after January 1, 2020 and before satisfying the HDHP deductible and still contribute to a HSA (through December 31, 2020).  Thus, an eligible individual with coverage under an HDHP who also received coverage beginning February 15, 2020 for telehealth and other remote care services under an arrangement that is not an HDHP and before satisfying the deductible for the HDHP will not be disqualified from contributing to an HSA during 2020.

To increase the usability of health reimbursement arrangements (“HRAs”), including individual coverage HRAs, Notice 2020-33 provides that a plan may treat premiums for health insurance coverage 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, or (3) the date the premium is paid. Thus, a calendar-year individual coverage HRA 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 before the first day of the plan year. This rule mirrors guidance previously set forth for qualified small employer HRAs (QSEHRAs).

Visit our COVID-19 Resource Center often for up-to-date information to help you stay informed of the legal issues related to COVID-19.



1 For this purpose, the employer may reasonably rely on a written certification provided by the employee, unless the employer has actual knowledge that the employee is not, or will not be, enrolled in other comprehensive health coverage that is not sponsored by the employer. Notice 2020-29 provides an example of an acceptable written attestation.