IRS Expands Ability to Allow Midyear Cafeteria Plan Election Changes

Many employers sponsor a Code Section 125 cafeteria plan to allow employees to choose from a variety of pre-tax benefits. As a general rule, a participant’s benefit election under a cafeteria plan may not be changed in the middle of a plan year unless the participant experiences a qualifying event (for example, if the participant gets married or has a child). As a result of the COVID-19 pandemic, many employees are facing unanticipated changes in the need for (or availability of) medical care and dependent care. Many employers want to accommodate their employees’ requests to change their cafeteria plan elections in light of the pandemic. In response to this issue, the IRS issued Notice 2020-29 (the “Notice”) on May 12, 2020. A summary of the Notice appears below.

A. Permitted Mid-year Changes

The Notice provides employers with temporary flexibility to permit certain mid-year election changes under a cafeteria plan in the absence of a qualifying event. Specifically, the Notice provides that an employer may amend its cafeteria plan to allow eligible employees to do any of the following, at any time during the 2020 calendar year:

1. make a new election for employer-sponsored health coverage on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage;
2. revoke an existing election for employer-sponsored health coverage and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis (including changing enrollment from self-only coverage to family coverage);
3. revoke an existing election for employer-sponsored health coverage 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 employer;
4. revoke an election, make a new election, or decrease or increase an existing election regarding a health flexible spending account (“FSA”) on a prospective basis; and
5. revoke an election, make a new election, or decrease or increase an existing election regarding a dependent care assistance program (“DCAP”) on a prospective basis.

Any permitted election changes must be applied on a prospective basis only. Additionally, any changes to a plan’s election requirements must not result in a failure to satisfy the nondiscrimination rules that apply to cafeteria plans.

B. Extended Claims Period for Health FSAs and Dependent Care Assistance Programs

The Notice also provides that an employer may amend its cafeteria plan to permit employees to apply unused amounts remaining in a health FSA or a DCAP as of the end of a grace period ending in 2020 or a plan year ending in 2020 to pay for expenses incurred for the same qualified benefit through December 31, 2020.

C. FSA Carryover Amount Increased to $550

A cafeteria plan may allow unused amounts remaining in a participant’s health FSA at the end of a plan year (up to a specified carryover limit) to be used for medical expenses incurred during the immediately following plan year. In Notice 2020-33, also issued on May 12, the IRS increased the health FSA carryover limit from $500 to $550.

D. Plan Amendments

An employer that decides to adopt one or more of the changes permitted by the Notice must amend its cafeteria plan document to reflect the changes. An amendment pertaining to the 2020 plan year must be adopted on or before December 31, 2021.

Please contact Mindi Johnson or Julie Hamlet if you’d like to discuss any of these issues further:

• Mindi M. Johnson...616.726.2252...mjohnson@fosterswift.com
• Julie L. Hamlet...616.796.2515...jhamlet@fosterswift.com

While the information in this article is accurate at time of publication, the laws and regulations surrounding COVID-19 are constantly evolving. Please consult your attorney or advisor to make sure you have the most up to date information before taking action.