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Section 125 COVID-19 relief: IRS on 2020 mid-year elections, FSA claims

The latest guidance from the Internal Revenue Service allows employer-sponsors of Section 125 cafeteria plans to permit mid-year changes to group health insurance, health FSA, and dependent care FSA elections. Plans may also extend grace periods on FSAs to cover eligible expenses through December 31, 2020. Learn how this new Section 125 COVID-19 relief can impact your Section 125 group health plan.

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The IRS continues to provide Section 125 COVID-19 relief to taxpayers by allowing employers to amend cafeteria plans to better meet families’ health coverage needs during the pandemic.

Section 125 COVID-19 relief to employers

Notice 2020-29 addresses requests from employer-sponsors of Section 125 cafeteria plans for relief needed to respond to their employees’ changing needs as a result of the COVID-19 pandemic. It allows employers to amend terms of a plan to allow mid-year elections for group health insurance, health FSAs, and dependent care FSAs.

Usually, Section 125 plan elections are made at the start of a plan year and cannot be changed for the duration of the year unless an employee or eligible dependent experiences a qualifying life event that opens a special enrollment period for them.

In 2020, the whole country is experiencing a shared qualifying life event as the coronavirus emergency wreaks havoc on our health and finances. That is why the Departments of the Treasury, Health & Human Services, and Labor (the Departments) are granting employer-sponsors of group health plans and flexible spending arrangements relief to change the terms of their plans for a Section 125 COVID-19 limited special enrollment for all employees.

Plan year vs. calendar year

Section 125 COVID-19 relief applies to elections made for the 2020 calendar year. Plans with a non-calendar year will allow mid-year elections through December 31, 2020. For example, if your plan year runs from April 1, 2020, through March 31, 2021, it will allow mid-year changes to elections through December 31, 2020, only.

Employer options

Employers may add all, some, or none of the Section 125 COVID-19 relief options to their group plans. All changes made by an employee’s mid-year elections are made on a prospective basis, effective from the date of the mid-year election to the end of the 2020 calendar year.

Plan amendment required

An amended plan document is required to support changes to the terms of a cafeteria plan’s tax-saving benefits. As additional relief to employers in this emergency, Core Documents offers a COVID-19 election change plan document amendment package for just $49 when ordered online, a 25% savings over the usual cost to amend a plan.

Plus, for the first time ever, Core Documents is offering a plan amendment for any Section 125 plan document, whether it was produced by us or not. Click here to order.

For more on COVID-19 relief in group health plans, read:

Coronavirus “CARES Act” restores OTC coverage for FSAs, HRAs, HSAs

Coronavirus health emergency: HDHPs can cover testing with HSA

Employee mid-year elections

Many employers have contacted the Departments, wanting to allow employees to make changes to current plan year elections in light of the many changes in their lives resulting from the COVID-19 pandemic. The new Section 125 COVID-19 guidance in Notice 2020-29 grants those requests.

There are various reasons employees will be thankful for the chance to make mid-year election changes for 2020. One is the expanded coverage of COVID-19 testing that was not available in group health plans at the first of the year.

A mid-year election can also be helpful to employees who did not elect to participate in a company’s health FSA at the start of the year, or who want to increase contributions now. Recent changes to these plans add coverage of menstrual products and of over-the-counter medications without a prescription, expanding their usefulness and potential tax savings.

A big change for a lot of families is dependent care needs. Essential employees putting in extra hours or faced with school closures may want to increase their DCAP FSA contributions for maximum tax savings, while those working from home may want to reduce their contribution to avoid a use-it-or-lose-it situation at the end of the year.

How it works

Employees eligible for coverage in an employer’s plan may, on a prospective basis:

• Elect to enroll in group health coverage the employee previously declined for the year;
• Change an election of group health coverage from one type or amount to another type or amount provided by the same employer;
• Cancel an existing election of group health coverage if the employee attests in writing that the employee is or will immediately be enrolled in qualifying health coverage not provided by this employer;
• Make a new election, change an election to increase or decrease the contribution, or revoke an election to participate in a health FSA or dependent care FSA. This provision includes limited purpose FSAs designed to work with a Health Savings Account.

Employer limits

The guidance allows employers to set certain limits on mid-year elections.

Unlimited election changes

Employers are not required to allow unlimited election changes through December 31, 2020, but may set a limit of how many changes are permitted and to what extent (see Adverse selection, below).

Adverse selection

Plans amended to include Section 125 COVID-19 relief provisions are still subject to nondiscrimination rules. To avoid adverse selection as a result of mid-year elections, employers can set a requirement that elections must “increase or improve” existing coverage.

For example, an employee may elect to change from a less expensive in-network only plan to a higher option plan that covers both in- and out-of-network providers, but may not elect to change from a higher option plan to one with only basic coverage options.

Contribution limits

An employer may stipulate that mid-year elections to change FSA contributions be set at no less than the amount already reimbursed to the employee through the plan.

For example: During open enrollment, on November 20, 2019, employee Mark Foster makes an election to contribute $1,200 to his health FSA during the course of the plan year. In February 2020, Mark slips on the ice and injures his back, and uses his health FSA debit card to pay amounts totaling the full $1,200. (The full amount is available on January 1, 2020, because health FSAs are subject to the uniform coverage rule).

In May 2020, Mark’s employer adds the Core COVID-19 plan amendment to its Section 125 cafeteria plan with the health FSA designed so that employees cannot make a mid-year election that is less than amounts already paid. Since Mark has already used the full amount of his original election, he may increase but not decrease it with a mid-year election.

On the other hand, employee Brenda Jones made an open enrollment election of $5,200 for her dependent care FSA (which is not subject to the uniform coverage rule) to cover expenses for her kindergartner to attend daycare before- and after-school.

Since April 1, 2020, Brenda has worked from home and her daughter’s school is closed, both due to the COVID-19 emergency. Brenda does not need daycare for her daughter for at least 16 weeks of 2020.   To avoid the possibility of losing $1,600 in unused funds at the end of the year, Brenda makes a mid-year election to reduce her DCAP FSA contribution.

Expanded FSA grace period

Usually, a cafeteria plan may offer either a grace period of 2.5 months for employees to apply unused FSA funds from the previous year to eligible expenses in the new year or up to a $500 rollover into the next plan year.

Section 125 COVID-19 guidance permits an employer-sponsored FSA to extend this grace period to cover eligible expenses incurred throughout the entire 2020 calendar year.

How it works

This change may be applied to an employer’s health FSA, dependent care FSA, or both, to pay eligible expenses incurred by the employee between January 1, 2020, and December 31, 2020.

For example: Mary Harper’s employer offers a health FSA that provides for a $500 annual rollover of unused funds. Since Mary had an unused balance of $1,200 in her health FSA on December 31, 2019, she lost $700 of that balance on January 1, 2020.

Effective June 1, 2020, Mary’s employer adds a Core COVID-19 plan amendment to their Section 125 cafeteria plan that includes the extended grace period for FSAs. Mary now has the entire $1,200 restored to her health FSA balance to cover eligible expenses incurred from January 1, 2020, to December 31, 2020.

More Health FSA News for 2020

In accordance with Presidential Executive Order 13877, “Improving Price and Quality Transparency in American Healthcare to Put Patients First,” the IRS issued guidance in Notice 2020-33 to increase the maximum health FSA carryover from $500 to $550 for the current calendar year for carryover into the 2021 calendar year, and to index the maximum carryover amount for all years that follow.

To make this rule effective for the carryover into 2021, employers must amend a plan document in effect on December 31, 2020. For details, see Health FSA roll-over indexed to inflation in 2021 plan years — IRS 2020-33 .

Section 125 COVID-19 amendment

The sooner an employer amends a Section 125 plan document for these changes, the sooner employees can make mid-year elections to their plan options. Fortunately, adding the COVID-19 amendment doesn’t have to be a difficult or expensive task.

$99 one-time fee ordered online

$129 one-time fee ordered via fax or email

As we navigate the COVID-19 pandemic together, employers have asked for relief under current Section 125 cafeteria plan rules that will permit changes to help employees with the changes stay-at-home mandates, school closures, and the disease itself may bring into their lives.

The Core COVID-19 plan amendment makes it simple and affordable for employers to apply the relief available through IRS Notice 2020-29. Adding this amendment to an existing Section 125 plan document means employees can make mid-year elections to change health insurance options and FSA contributions that better fit their lives for the duration of the emergency.

And, for the first time ever, Core Documents is offering a plan amendment to employers whose current plan document was made by us and to those whose were not.

Just click an ordering option to get started:

Order Online	Fax Order Form

No annual fee — Core Documents does not require an annual renewal fee to maintain your plan document package. A plan document only needs to be updated when there are changes in the plan or in the law that make it necessary. We will notify you when there are sufficient changes in the Code to require amending and restating your Plan and ask that you keep us informed when there is a change to your plan.  You can amend and update your plan document anytime, at a discounted fee and only when necessary, which is the most cost-effective way to maintain it.

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