Submitted by Joel Shabsin, CPA

Recently the IRS issued 2 notices making temporary changes to Section 125 Cafeteria Plans (Notice 2020-29) and to high deductible health plans.
The 2020-29 notice provides that a 125 Cafeteria plan can, during the 2020 calendar year, allow eligible employees to:

1. Make a new election regarding employer sponsored health care coverage if the employee initially decided not to enroll in the coverage during the enrollment period.
2. Revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer
3. Revoke an election to participate in the employer’s plan providing the employee certifies they are or will immediately be enrolled in another plan not sponsored by the employer
4. Revoke an election, make a new election or decrease or increase an election related to a health FSA
5. Revoke an election, make a new election, or decrease or increase an election made for dependent care assistance.

The notice also allowed plan participants to apply any unused amounts from a Health FSA or dependent care assistance program in a 125 cafeteria plan to pay or reimburse medical care expenses or dependent care expenses, respectively, through December 31, 2020. It also allowed high deductible plans to pay for telehealth services retroactively to January 1, 2020.

The notice changes the previous regulations that required elections under a 125 cafeteria plan to be made prior to the beginning of the plan year and once made the election is irrevocable for the year. The above changes have been made to allow employees to change their coverages or to add coverages to meet their individual needs which most likely have changed as a result of the Covid 19 virus. For example, with most preschool and after school programs cancelled, many employees no longer need dependent care coverage for their children but may want to increase their pretax contribution to or start a new health care program that they initially
declined because their medical expenses have increased as a result of the virus or a spouse who covered them under their health insurance program lost their coverage because of a job loss or business shut down.

The notice provides temporary flexibility for section 125 cafeteria plans and allows an employer, at their discretion, to amend their current plan. The notice allows employers to determine the changes they want to make. It does not require them to make unlimited changes. However, employer plans must be amended to stay in compliance if the employer wants to make any of the above changes.

The second notice, Notice 20-33, adjusts the unused Health FSA carryover amounts from $500 to $550. This makes the regulation conform with the original intent of the law to allow participants to carryover up to 20% of the maximum contribution allowed for any unused benefits during a plan year. The 2020 maximum allowable contribution to an FSA is $2750 and 20% of that is $550. As in the past, any unused benefit over the $550 carryover amount is forfeited.