News & Events

New IRS Guidance for Flexible Compensation Plans

The IRS issued two notices (2020-29 and 2020-33) that provide new guidance for flexible compensation plans (also known as Section 125 cafeteria plans), which employers may choose to follow.  Notice 2020-29 provides guidance permitting special modifications to flex plans as part of the response to the COVID-19 pandemic, while Notice 2020-33 provides new guidance on the carryover amount allowed for a health flexible spending arrangement.

 

Notice 2020-29 provides COVID-19 guidance permitting special modifications to flexible compensation plans, including the following:

  • Mid-year elections election changes during calendar year 2020 to:
    • Employer-sponsored health coverage, including
      • allowing employees to make a new election, if the employee initially declined to elect employer-sponsored health coverage;
      • revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis (including changing enrollment from self-only coverage to family coverage); and
      • revoke an existing election on a prospective basis, provided that the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer;
    • Health flexible spending arrangements (health FSA), including limited purpose health FSAs compatible with an HSA, to revoke an election, make a new election, or decrease or increase an existing election applicable to a health FSA on a prospective basis;
    • Dependent care assistance programs (DCAP), to revoke an election, make a new election, or decrease or increase an existing election regarding a dependent care assistance program on a prospective basis.
      In addition, with respect to health FSAs and DCAPs, employers are permitted to limit mid-year elections to amounts no less than amounts already reimbursed.

These mid-year election changes are permitted but not required.  If an employer wishes to allow any or all of these changes, an amendment will be needed for the flex plan, which must be adopted on or before December 31, 2021, and may apply retroactively to January 1, 2020. The employer must inform all employees eligible to participate in the flex plan of the changes to the plan.

  • Grace periods to apply unused amounts in a
    • Health flexible spending arrangements (health FSA) to medical care expenses incurred through December 31, 2020; and/or
    • Dependent care assistance programs (DCAP) to expenses incurred through December 31, 2020.

Typically when an employer sponsors a flex plan with a health FSA and/or DCAP that operates on a calendar year and that provides for a grace period, employees would have until March 15 of the following year to submit receipts to apply unused funds remaining in the account.  This grace period change would allow employees to apply unused amounts remaining in an employee’s health FSA or DCAP as of March 15, 2020, to reimburse the employee for medical care or dependent care expenses incurred through December 31, 2020.

These grace period changes for a health FSA or DCAP are permitted but not required.   If an employer wishes to allow one or both of these grace period changes, an amendment will be needed for the flex plan, which must be adopted on or before December 31, 2021, and may apply retroactively to January 1, 2020.  The employer must inform all employees eligible to participate in the flex plan of the changes to the plan.

Employers need to consider the impact and costs of any of these changes that are now allowed for their flex plans before adopting these measures.

 

Notice 2020-33 applies to plans with carryovers for a health FSA, providing new guidance on the amount of carryover allowed for unused amounts at the end of the plan year.

Previous IRS notices did not provide for any adjustment to the maximum $500 carryover amount.  This notice now provides for adjustments to the maximum amount that will be based on 20% of the maximum health FSA salary reduction contribution.  Because the maximum amount of a contribution to a health FSA for 2020 is $2,750, the maximum amount of carryover for a plan year beginning in 2020 to the plan year beginning in 2021 will be $550.

If the health FSA currently permits the $500 carryover, the plan will need to be amended to permit periodical adjustments to the carryover.  Although this change is discretionary, meaning the employer can choose to adopt this provision or not, amending the plan in this matter will allow the carryover amount to be changed based on the amount allowed by the IRS, rather than having a specific amount listed in the plan and needing to amend the plan each time the amount is changed.

In conjunction with changes allowed under Notice 2020-29, an amendment to permit the carryover for the 2020 plan year must be adopted on or before December 31, 2021, and may be effective retroactively to January 1, 2020, provided that the employer informs all individuals who are eligible to participate in the plan of this change.

Note that a health FSA can have either a grace period or carryover provision, but not both.

 

Finally, it’s important to note that all employees eligible to participate in the flex plan need to be notified of any changes that you decide