COVID-19 IRS Employee Benefits Update: Mid-year election changes to §125 cafeteria plan elections

In response to the COVID-19 pandemic, the IRS on May 12 issued Notice 2020-29 related to §125 cafeteria plans and high deductible health plans. Notice 2020-29 is intended to assist employers and employees by temporarily relaxing for calendar year 2020 some of the restrictions on mid-year election changes under the §125 cafeteria plan regulations that limit when mid-year changes are permitted to cafeteria plan, health flexible spending arrangements (health FSAs), and dependent care reimbursement arrangements. The following summarizes the new IRS guidance.

Mid-Year Elections: With respect to employer-sponsored health coverage, an employer may amend its §125 cafeteria plan to permit employees who are eligible to make salary reduction contributions under the plan for health insurance, on a prospective basis: (i) to make a new election if coverage previously had been declined, (ii) to revoke and change an existing election to change plans (e.g., HMO to PPO) and/or to change coverage (e.g., single to family) or (iii) to revoke coverage under the employer plan in order to enroll in other coverage. The employer also may permit an employee to revoke an election, make a new election, or decrease or increase an existing election applicable to health FSAs or a dependent care reimbursement arrangement, also on a prospective basis. This relief applies to coverage under both self-insured plans and fully insured health plans, as well as all health FSAs, including limited purpose health FSAs compatible with Health Savings Accounts (HSAs). Although plans may be amended to permit prospective election changes only, if an employer has permitted any of the election changes described above prior to the issuance of the Notice, the IRS is permitting the employer to amend the plan retroactively to January 1, 2020 to ratify those election changes if they otherwise are in compliance with the Notice.

NOTE: For fully insured plans, an employer should confirm with its carrier that it will accommodate these mid-year election changes before implementing these changes.

Unused Amounts in Health FSA or Dependent Care Assistance Program: Employers with a §125 cafeteria plan also may permit employees with unused amounts remaining in a health FSA or dependent care assistance program as of the end of a grace period or plan year ending in 2020 to apply those unused amounts to pay or reimburse medical or dependent care expenses incurred through December 31, 2020. The time extension for incurring claims is available to both §125 plans that provide a grace period and plans that allow for a carryover.

Related to this extension, in Notice 2020-33 the IRS announced that the maximum carryover amount is now indexed for inflation at 20% of the FSA contribution limit (rounded to the next lowest multiple of $50) beginning with the 2020 plan year. The 2020 health FSA contribution limit, as adjusted for inflation, is $2,750; the carryover limit for 2020 therefore is $550 (20% of $2,750). This is the maximum amount that may be carried over into 2021 from the 2020 plan year. The limit on 2019 plan year carryovers remains $500.

Plan Amendments: §125 cafeteria plans must be amended to implement any of the forms of relief described above. Such amendment will be considered timely provided if it is adopted prior to December 31, 2021. Any timely-adopted amendment may be retroactive. Notice 2020-29 also requires that plan sponsors notify participants in order to take advantage of the relief provided by the Notice. The Notice does not specify either the time or form of such participant notification.

High Deductible Health Plan (HDHP) Relief: Section 3701 of the CARES Act amended Code §223 to provide a temporary safe harbor for providing coverage for telehealth and other remote care services. IRS Notice 2020-15 states that a health plan that otherwise satisfies the requirements to be an HDHP under Code §223 will not fail to be an HDHP merely because the health plan provides medical services and items related to COVID-19 testing and treatment prior to the satisfaction of the applicable minimum deductible. Notice 2020-29 clarifies that the relief provided in Notice 2020-15 applies to services provided on or after January 1, 2020 with respect to plan years beginning on or before December 31, 2021.

For more information on Notice 2020-29 or assistance in implementing the relief it provides for mid-year election changes under §125 cafeteria plans, please contact Edward F. Feibel,, Anne O’Donovan,, or Jack Bjorn,