On May 12, 2020, the IRS released Notice 2020-29 which provides much needed plan year election relief for participants in Health Care FSAs (HCFSAs), Limited Purpose FSAs (LPFSAs), Dependent Care FSAs (DCFSAs) and Section 125 plans in general. Notice 2020-33 increases the carryover amount for HCFSAs and LPFSAs. Both Notices are in response to the COVID-19 National Emergency, as the pandemic altered the funding needs for many HCFSA, LPFSA and DCFSA participants.
Section 125 of the IRS code allows employees to pay for their group health insurance premiums pre-tax and also participate in HCFSAs, LPFSAs and DCFSAs. Generally, the pre-tax elections are irrevocable during the Plan Year except for certain limited qualifying events that allow a participant to change their elections.
IRS Notice 2020-29: Allows Mid-Year Election Changes
The IRS recognized that due to the COVID-19 National Emergency, some participants may have greater or lesser medical and/or dependent care expenses. In response, the IRS released temporary relief for 2020 that allows plan sponsors to permit mid-year election changes on a prospective basis for employer group health coverage, HCFSAs, LPFSAs and DCFSAs elections.
Employers may amend their plans to allow employees to:
- Make a new election for the employer group health plan (even if they initially declined the coverage)
- Revoke an existing group health plan election and select another plan option at the employer (if the employer offers multiple group health plan options)
- Revoke an existing group health plan election if a participant attests they will immediately secure health coverage elsewhere
- Revoke or newly make a HCFSA, LPFSA and/or DCFSA election
- Increase or decrease a current HCFSA, LPFSA and/or DCFSA election
If an employee wishes to reduce their FSA election, they cannot reduce it below the amount already reimbursed or contributed. The employer is not required to implement these options.
IRS Notice 2020-29: Extends the Claim Period for FSAs
The IRS also recognized that certain participants may have already contributed FSA funds and could potentially lose those funds due to providers cancelling appointments, day care centers closing, etc. In response, the IRS issued temporary relief that provides flexibility and allows plans to extend the timeframe for incurring and filing medical and dependent care claims. This is ‘extra time’ for employees to actually incur expenses and submit claims.
Employers may amend their plan to:
- Extend the timeframe to utilize FSA funds that remain unused at the end of the plan year that ends in 2020. Participants with unused FSA funds may continue to apply those unused FSA funds toward eligible expenses incurred through 12/31/2020.
- Example: An employer offers a HCFSA and DCFSA and the Plan Year ends 6/30/20. The employer may amend their plan to allow unused HCFSA and DCFSA funds to reimburse expenses incurred 7/1/20 – 12/31/20. Unused HCFSA cannot be used for DCFSA expenses however and vice versus.
The extended claim period is available for Plan Years that end in 2020 as well as those that have the HCFSA carryover provision or the 2 ½ month Grace Period. It is available for all plans.
The extension, if adopted, would make someone ineligible to make Health Savings Account (HSA) contributions during the extension period if they were enrolled in the HCFSA as they would be considered a participant in the HCFSA. Participation in the HCFSA is considered a form of disqualifying health coverage for HSA contribution purposes.
If you are a debit card client, participants with claims for qualified expenses that are incurred during the extension period should file a claim by using the DBS phone app, online or by faxing/mailing in a claim form with supporting documentation.
IRS Notice 2020-33: Increases the $500 Carryover Provision
The IRS also addressed requests to raise the amount that HCFSAs and LPFSAs are allowed to carryover from one Plan Year to the next. Many FSA plans adopted the carryover provision which allows plan participants to carryover up to $500 of unused HCFSA and LPFSA funds into the next Plan Year.
IRS Notice 2020-33 increased the maximum carryover amount from $500 to $550 for a Pan Year starting in 2020. Future carryover levels will be indexed to 20% of the HCFSA/LPFSA contribution maximum (currently at $2,750). Future increases will be in increments of $10 multiples. This Notice is a permanent change to the carryover amount. The notice also provides temporary relief whereby a participant may increase their 2020 election or newly elect to participate mid-year.
Employers may amend their plan to:
- Increase the carryover to $550 for plan years starting in 2020
- Allow HCFSA and LPFSA participants to increase their 2020 elections
- Allow employees to make a mid-Plan Year election if they previously waived the plan
Amendments for a 2020 Plan Year must be completed and adopted by 12/31/2021.
Client Action Items
The IRS Notices are welcome relief for many people participating in account based benefit plans as they have seen their medical and dependent care expenses change due to the pandemic.
Please consider which of the above relief measures you may want to implement. To assist clients with notifying DBS of the options elected, you received an email containing a COVID-19 National Emergency Relief Checklist to review. Please complete the form if you wish to make changes and email it to firstname.lastname@example.org so proper amendments and system updates can be made.
This notice is not to be construed as tax or legal advice.