Employee Benefits Compliance, COVID-19

Cafeteria Plans May Allow Additional Mid-Year Changes, FSAs may Reimburse Through 2020

Current as of 5/12/2020

The COVID-19 Environment

Since the COVID-19 virus pandemic took hold in the United States, employees have seen a reduction in hours, change in childcare and schools, furloughs, layoffs, leaves, or even more complex employment changes. The employees’ health plans, Dependent Care Assistance Program (DCAP), and Flexible Spending Accounts (FSA) are all affected, it would seem, but the Internal Revenue Code (IRC) did not allow for mid-year election changes unless meeting the specific requirements of IRC 125-4 permitted election change in status life events. Many COVID-19 situations did not qualify for mid-year election changes. Until now.

What’s Changed?

The Internal Revenue Service (IRS) released Notice 2020-29 to provide increased flexibility with respect to mid-year election changes. Increased flexibility with respect to:

  • Grace periods to apply unused amounts in health FSAs to medical care expenses incurred through December 31, 2020.
    • May use FSA funds until the end of 2020.
  • Unused DCAP to dependent care expenses incurred through December 31, 2020.
    • May use DCAP funds through the end of 2020.
  • Additional permissions to change election upon a change in status with expanded possibilities, such as making new elections.
    • May allow employees to revoke, add new, change, increase, or decrease health coverage, including FSA and DCAP contributions.

Permitted 2020 Mid-Year Election Change Rules

In order to qualify to be a pre-tax IRC 125 plan, elections must be irrevocable and made prior to the beginning of the plan year, apart from the permitted changes in IRC 125-4. Due to the nature of the public health emergency posed by COVID-19 and the unanticipated changes in the need for medical and child care, some employers have indicated a willingness to offer employees coverage though they initially declined or offer the opportunity to change their election to meet their current, due to the unanticipated situation. Some employers have also indicated willingness to allow changes due to other situations that do not fit squarely into IRC 125-4, allowing a mid-year election change to the plan election.

This notice has resulted from this need. Per Notice 2020-29, the following changes are permitted through the 2020 year. These are temporary changes.

Health Coverage

For any health coverage offered, the employer may permit employees to:

  1. Make a new election on a prospective basis, if the employee initially declined to elect coverage.
  2. Revoke an existing election and make a new election to enroll in different coverage, prospectively, including changing from self-only to family coverage.
  3. Revoke existing election, provided that the employee attests in writing that employee is enrolled or immediately will enroll, in other health coverage not sponsored by the employer.

Sample Written Attestation

Name: _______________________ (and other identifying information requested by the employer for administrative purposes).

I attest that I am enrolled in, or immediately will enroll in, one of the following types of coverage:

  • Employer-sponsored health coverage through the employer of my spouse or parent;
  • Individual health insurance coverage enrolled in through the Health Insurance Marketplace (also known as the Health Insurance Exchange);
  • Medicaid;
  • Medicare;
  • Civilian Health and Medical Program of the Department of Veterans Affairs (CHAMPVA); or
  • Other coverage that provides comprehensive health benefits (e.g., health insurance purchased directly from an insurance company or health insurance provided through a student health plan). 

Signature: ______________________

Flexible Spending Account

Carryover Rule. An IRC 125 cafeteria plan may optionally permit the carryover of unused amounts remaining in a health FSA as of the end of the plan year to pay or reimburse for medical care expenses incurred during the following plan year (subject to an increased limit of $550 and special rules).

Grace Period Rule. A cafeteria plan may permit unused amounts remaining at the end of the plan year during a period of up to two and half months and 15 days immediately following the end of the plan year.

One or the other rule above, or neither, may apply to a plan and not both. With this new Notice, employers may permit an extended grace period through the 2020 year. This would have HSA and carryover implications, discussed within this article.

What’s Changed?

This Notice now also permits an employee to make changes to their FSA plan, with the extended grace period, upon employer adoption of the change. The employer may also allow an employee to:

  1. Revoke an election.
  2. Make a new election.
  3. Decrease or increase an existing election.

These changes, as with all in this Notice, must be prospective.

The following example illustrates how a plan with a July 1 plan year that allows a $500 carryover would implement the extended period for incurring claims allowed by this notice:

Example 1. Employer provides a health FSA under a § 125 cafeteria plan that allows a $500 carryover for the 2019 plan year (July 1, 2019 to June 30, 2020). Pursuant to this notice and Notice 2020-33, Employer amends the plan to adopt a $550 (indexed) carryover beginning with the 2020 plan year, and amends the plan to adopt the temporary extended period for incurring claims with respect to the 2019 plan year, allowing for claims incurred prior to January 1, 2021, to be paid with respect to amounts from the 2019 plan year.

Employee A has a remaining balance in his health FSA for the 2019 plan year of $2,000 on June 30, 2020, because a scheduled non-emergency procedure was postponed. For the 2020 plan year beginning July 1, 2020, Employee A elects to contribute $2,000 to his health FSA. Employee A is able to reschedule the procedure before December 31, 2020 and, between July 1, 2020, and December 31, 2020, incurs $1,900 in medical care expenses. The health FSA may reimburse Employee A $1,900 from the $2,000 remaining in his health FSA at the end of the 2019 plan year, leaving $100 unused from the 2019 plan year. Under the plan terms that provide for a carryover, Employee A is allowed to use the remaining $100 in his health FSA until June 30, 2021, to reimburse claims incurred during the 2020 plan year. Employee A may be reimbursed for up to $2,100 ($2,000 contributed to the health FSA for the 2020 plan year plus $100 carryover from the 2019 plan year) for medical care expenses incurred between January 1, 2021, and June 30, 2021. In addition, Employee A may carry over to the 2021 plan year beginning July 1, 2021, up to $550 of any remaining portion of that $2,100 after claims are processed for the 2020 plan year that began July 1, 2020. A grace period is not available for the plan year ending June 30, 2021.

FSA Interaction with HSA & Telehealth

Coverage in a general-purpose FSA will result in disqualification for an HSA. Similarly, a telehealth arrangement constituting a health plan providing coverage pre-deductible (that is not preventive or other disregarded coverage) would disqualify an individual from HSA eligibility. However, the CARES Act amended IRC 223 to allow such telehealth services pre-deductible. This means if employers are providing an additional grace period throughout the 2020 year and beyond the plan year, the following year the employee may be HSA ineligible due to the general-purpose FSA or telehealth offering (if not preventive). Consider allowing conversion to a limited purpose FSA during a grace period and limiting telehealth coverage to preventive or disregarded services.

Dependent Care Assistance Programs

Like health FSA, employers are permitted to amend their cafeteria plans to allow employees to:

  1. Revoke an election.
  2. Make a new election.
  3. Decrease or increase an election.

Unused FSA & DCAP Funds

For unused amounts remaining in the health FSA and DCAP as of the end of a grace period, for the period or plan year ending in 2020, a cafeteria plan may permit employees to apply those unused funds to pay or reimburse medical care expenses or dependent care expenses, respectively, incurred through December 31, 2020.

Employers are permitted to limit mid-year election changes to amounts no less than amounts already reimbursed.

High-Deductible Health Plan (HDHP) & Telehealth Rules

HDHP & HSA. IRS Notice 2020-15 allowed services and expenses for COVID-19 and telehealth services pre-deductible and still be a Health Savings Account (HSA) qualified HDHP. These permissions have also been extended through January 1, 2021.

Additional Testing Covered No Cost. This Notice also clarifies that the panel of diagnostic testing for influenza A & B, norovirus, and other coronaviruses and respiratory syncytial virus and items or services are required to be covered with no cost-sharing, in addition to the COVID-19 testing and vaccinations.

Telehealth. This notice provides that telehealth treatment under HDHP if offered pre-deductible or below minimum deductible is permitted for services on or after January 1, 2020, and applies through plan years beginning on or after December 31, 2021.

What’s Changed in Qualified Events?

How or what the situations are that invoke the right to these changes will be up to the employers. Employer must also check with the carriers. What is common are those same change in status events in IRC 125-4, in addition to changes such as change in salary, childcare needs, FSA needs, and other common, unanticipated scenarios resulting from COVID-19. Be sure to check with your carrier.


Permissions are Voluntary. Employers utilizing this relief (it is voluntary to allow these changes) are not required to provide unlimited election changes but may, in its discretion, determine the extent which such election changes are permitted and applied, so long as it is prospective only and compliant with the nondiscrimination rules. Employers should consider adverse selection when applying these rules in determining whether to permit them. To prevent adverse selection, an employer may wish to limit circumstances in which employees’ coverage will be increased or improved (such as switching from employee-only to family coverage or from a low to high cost option).

Plan Amendment. If changing plans to utilize these flexibilities, ensure compliance with rules regarding notice to employees in the form of a Summary of Material Modifications (within 210 days from adopting the change, or sooner if a reduction in coverage or it is prudent – Leavitt Compliance recommends within 60 days to optimize the effect of these changes or i.e., properly provide notice when notice most matters). Plan documents must also be amended to allow for these election changes. The Notice allows adoption of a plan amendment on or before December 31, 2021, retroactive to January 1, 2020.

This relief applies retroactively to periods prior to this Notice date of May 12, 2020 – on or after January 1, 2020.

This is not intended or provided as legal or tax advice. Consult your legal professional to ensure compliance with all applicable data in this ever-changing environment.