Type: Law Bulletins
Date: 05/13/2020

IRS Issues Guidance Providing Relief for Employees With Respect to Cafeteria Plan Elections

When employees were going through the open enrollment process and making benefit elections at the end of 2019, no one could have anticipated the economic impact of COVID-19. However, after the first quarter of 2020, employees may be rethinking their elections, especially due to reduction in income and the closing of child care facilities. In response to the COVID-19 outbreak, the Internal Revenue Service (IRS) has now provided additional flexibility for employees to change their elections on a prospective basis for 2020 without requiring that employees satisfy the change-in-status rules. 

An employer, at its discretion, may amend its cafeteria plan to allow its employees to:

  1. Make a new election for group health coverage if the employee initially declined the coverage.
  2. Revoke an existing group health coverage election and make a new election to enroll in different health coverage sponsored by the same employer (including changing from self-only to family coverage).
  3. Revoke an existing group health coverage election, provided the employee attests in writing that he or she is enrolled, or will immediately enroll, in other health coverage not sponsored by the employer (such as coverage under a spouse’s plan).
  4. Revoke an election, make a new election, or decrease or increase an existing health FSA, including a limited-purpose health FSA, election.
  5. Revoke an election, make a new election, or decrease or increase an existing dependent care assistance program (DCAP) election.

Employers may also allow an extended period within which employees may apply any unused amounts remaining in a health FSA, including a limited-purpose FSA, or a DCAP account at the end of the grace period or plan year ending in 2020, to reimburse medical care or dependent care expenses, respectively, incurred through Dec. 31, 2020. This allows the amount in an employee’s health FSA that is not used to pay or reimburse expenses incurred in 2019 to be used to pay or reimburse expenses incurred during the 2020 plan year (through Dec. 31, 2020).

It is important to note that employers are not required to implement any of these changes. An employer may implement some, all, or none of these options. In addition, the increased flexibility applies to all employees who are eligible to participate in a cafeteria plan without regard to whether or not or how they have been impacted by COVID-19.

Finally, the IRS has increased the health FSA carryover limit from $500 to $550 with respect to amounts to be carried over to the plan year beginning in 2021.

Please visit our COVID-19 Toolkit for all of Taft’s updates on the coronavirus.

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