Recent Federal Guidance on Cafeteria Plans Related to the National Emergency

June 12, 2020

The federal government released new guidance related to COVID-19. Below are some highlights of the May 4, 2020, guidance from the Internal Revenue Service (IRS) in Notices 2020-29 and 2020-33 pertaining to cafeteria plans.

Sponsors of cafeteria plansgroup health plans and health flexible spending accounts (FSAs) should consult their legal advisors about applying this guidance to their plans.

Mid-year Cafeteria Plan Changes

The IRS guidance allows certain mid-year cafeteria plan election changes during 2020 on employer-sponsored health coverage and health FSAs. It also allows employees to pay for such coverages on a pre-tax basis.

The cafeteria plan changes in the guidance are optional for employer groups and include:

  • Elect Employer-sponsored Health Coverage. Employees may make a new cafeteria plan election for employer-sponsored health coverage on a prospective basis if they initially declined to elect such coverage.
  • Decline Employer-sponsored Health Coverage:
    • Employees may revoke an existing election for employer-sponsored health coverage and make a new cafeteria plan election for different health coverage sponsored by the same employer on a prospective basis (including changing elections from self-only to family coverage).
    • Employees may revoke an existing election for employer-sponsored health coverage on a prospective basis, provided that an employee attests in writing that they are enrolled, or immediately will enroll, in other comprehensive health coverage not sponsored by the employer.
  • Health FSAs. Employees may revoke an election, make a new election, or decrease or increase an existing health FSA election on a prospective basis.

Applies to: According to the guidance, the relief may be applied retroactively to dates on or after Jan. 1, 2020. However, the mid-year election changes only apply to calendar year 2020.

If an employer decides to allow these changes, it must amend its applicable plan(s) to reflect the changes on or before Dec. 31, 2021, and satisfy the other applicable requirements of the guidance. 

Even though there may be an extended time period to amend the plan, employers must inform participants of any changes.

Health FSAs

The IRS guidance addresses several components of health FSAs.

Health FSA Claims Period

The guidance permits amounts remaining in health FSAs on the last day of the grace period or plan year ending in 2020 to be used to reimburse eligible expenses incurred through Dec. 31, 2020. These potential changes are optional for employer groups.

  • The relief provided by the guidance is effective for grace periods and plan years that end on or after Jan.1, 2020.
  • If an employer decides to allow these changes, the guidance indicates that it must amend its applicable plans to reflect the changes on or before Dec. 31, 2021, and satisfy any other applicable requirements of the guidance.

Health FSA Carryovers

The guidance provides for indexing the maximum amount that may be carried over at the end of a plan year. These potential changes are optional for employers.

  • The guidance adopts an increase to the maximum carryover amount equal to 20% of maximum salary reduction contribution for a plan year (currently $2,750).
    • For example, for calendar year plans, a change could result in a maximum carryover increasing from $500 to $550 for 2020 plan year.
  • According to the guidance, the potential changes are effective beginning with carryovers for the 2020 plan year to the 2021 plan year. 
  • If an employer decides to allow these changes, the guidance indicates that it must amend its applicable plans to reflect the changes on or before the last day of the plan year and satisfy the other applicable requirements of the guidance.