Cafeteria Plan and FSA Relief: IRS Update

cafeteria plan

The IRS released Notice 2020-29 and Notice 2020-33 on May 12, 2020 that impact cafeteria plan administration. The BASIC Compliance team is currently reviewing these Notices and will provide more in-depth practical insight in the near future. Because the issued guidance applies to many of the questions we are receiving daily, here are the highlights:

Mid-Year Election Changes

  • Health Coverage – Employers may allow employees to make prospective mid-year elections with regard to employer sponsored health coverage. These permissive election changes include: (1) electing previously declined coverage, (2) electing different employer sponsored health coverage, and (3) revoking elections in certain circumstances.
  • Health FSA and Dependent Care FSA – Employers may allow employees to make prospective mid-year elections to revoke a previous election, make a new election, or change an election (increase or decrease amount).

Unused Amounts in Health FSAs and Dependent Care FSAs

On May 4, 2020, regulations were issued by the Department of Labor’s Employee Benefits Security Administration (EBSA) and the IRS providing claims deadline relief (impacting employer sponsored plans subject to ERISA). The regulations require ERISA plans to “disregard” the period from March 1, 2020 through the date that is (60 days) after the end of the “Outbreak Period.” Everyone was left wondering how to apply these regulations to FSAs given the “Use it or Lose it” rule.

Under Notice 2020-29, the IRS clarifies that employers may allow employees to use amounts from their 2019 Health FSAs and Dependent Care FSAs to pay for or reimburse medical or dependent care expenses, respectively, incurred through December 31, 2020. This applies for any cafeteria plan that has a grace period or plan year ending in 2020.

Health FSA Carryover Amounts

For all plan years beginning in 2020, the amount that employers may allow employees to carryover from one plan year to the next will be indexed in step with the maximum salary reduction amount permitted each year. This means that $550 may be carried over from a plan year starting in 2020 to the following plan year beginning in 2021.

Employers wishing to provide these expanded mid-year election changes, extended periods to use amounts in FSAs, and/or increased carryover amounts must adopt plan amendments to the cafeteria plan by December 31, 2020. BASIC will soon provide instructions to employers on how to amend your plan.


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