On May 12, 2020, the IRS released two notices (Notice 2020-29 and Notice 2020-33) that provide COVID-19 related and other relief for cafeteria plans, health savings accounts (HSAs), health flexible spending accounts (FSAs), dependent care FSAs, and various types of reimbursement arrangements (including HRAs and individual coverage HRAs).  This alert summarizes the relief included in each Notice.

Notice 2020-29

In Notice 2020-29, the IRS provided relief with respect to the Section 125 irrevocable election rule, the use of health FSA and dependent care FSA balances, and eligibility for HSA contributions.

Temporary Relief from the Irrevocable Election Rule

Notice 2020-29 provides additional exceptions to the irrevocable election rule that will be applicable only during the 2020 calendar year.  Under this temporary relief, eligible employees may:

1. Make a new election, effective prospectively, to pay for employer-sponsored health coverage on a pre-tax basis;
2. Revoke an existing pre-tax premium election and make a new election, effective prospectively, to pay for a different type or level of employer-sponsored health coverage on a pre-tax basis;
3. Revoke an existing pre-tax premium election to correspond to the cancellation of employer-sponsored health coverage, provided the employee attests that he/she is enrolled, or will immediately enroll, in other health coverage;
4. Make any type of election change (e.g., make a new election, revoke an existing election, or increase or decrease an existing election), effective prospectively, under a health FSA for any reason; and
5. Make any type of election change (e.g., make a new election, revoke an existing election, or increase or decrease an existing election), effective prospectively, under a dependent care FSA for any reason.

IMPORTANT:  These exceptions are OPTIONAL.  An employer is not required to adopt these new exceptions and may adopt some, but not all, of them.  However, any changes implemented by an employer must be reflected in an AMENDMENT to the employer’s plan.  The amendment must be adopted no later than December 31, 2021 (with retroactive effect), provided the employer informs all employees eligible to participate in the plan of the changes when the changes are implemented.

Temporary Relief from Use-Or-Lose Rule – Claim Grace Periods under Health FSAs and Dependent Care FSAs

Notice 2020-29 allows employers to amend their health FSAs and/or Dependent Care FSAs to provide (or extend) a claims grace period during 2020.  This relief is available to calendar year plans that already have a grace period that expired in 2020 and to fiscal year plans with respect to the plan year ending during 2020.  This relief is not applicable to calendar year plans that did not have a grace period in place with respect to the 2019 plan year. It also is not applicable beyond 2020.

Under this relief, the health FSA and dependent care FSA can allow participants to use any balances remaining upon expiration of the grace period or plan year ending in 2020 to reimburse expenses incurred during the remainder of 2020.  This relief is available even if a health FSA currently includes the carryover provision (despite the normal rule that prohibits a health FSA from including both a claim grace period and a carryover).

Example 1:  Employer’s health FSA and dependent care FSA operate on a calendar year basis and include a claim grace period that expires March 15.  Employer may amend its plans to allow any 2019 account balances remaining on March 15th to be used to reimburse any medical or dependent care expenses incurred during the remainder of 2020.   Example 2:  Employer’s health FSA and dependent care FSA operate on a fiscal year basis with the plan year ending June 30th.  Neither plan currently includes a claim grace period.  Employer may amend its plans to allow any 2019 account balances remaining on June 30th to be used to reimburse any medical or dependent care expenses incurred during the remainder of 2020.

 

Caution:  The addition or extension of a claim grace period under a full scope health FSA pursuant to this relief will have an impact on HSA eligibility.  Participants who have account balances at the end of the existing grace period or plan year (as applicable) will be ineligible for HSA contributions for as long as the claims grace period is provided.  If the employer takes advantage of the full relief, which allows the plan to provide a claims grace period until December 31, 2020, such participants will not be eligible to make or receive HSA contributions under January 1, 2021, at the earliest.

Plans that adopt the extended grace period must continue to limit reimbursements solely to expenses eligible under the particular plan (i.e., the health FSA balance may be used solely for medical expenses and the dependent care FSA balance may be used solely for dependent care expenses).

Note:  The addition or extension of a claim grace period is OPTIONAL.  An employer is not required to adopt this change.  However, any changes implemented by an employer must be reflected in an AMENDMENT to the employer’s plan.  The amendment must be adopted no later than December 31, 2021 (with retroactive effect), provided the employer informs all employees eligible to participate in the plan of the change when the change is implemented.

Retroactive Effect of Prior Changes Regarding HSA Eligibility and HDHPs

Notice 2020-29 provides that certain prior changes to the rules governing HSA eligibility and HDHPs are effective January 1, 2020.

• In Notice 2020-15, the IRS had previously indicated that HDHPs may cover COVID-19 testing and treatment prior to satisfaction of minimum HDHP deductible without jeopardizing the plan’s status as a qualifying HDHP. Pursuant to Notice 2020-29, the effective date of this relief is now January 1, 2020.
• The CARES Act provides that an individual may receive telehealth, whether through an HDHP or outside of the HDHP, prior to satisfaction of the minimum HDHP deductible without causing the individual to be ineligible for HSA contributions. Pursuant to Notice 2020-29, the effective date of this relief is now January 1, 2020.

Notice 2020-33

In Notice 2020-33, the IRS modified the rules regarding health FSA carryovers and the rules regarding reimbursement of health premiums.

New Carryover Amount

Under the initial guidance authorizing limited carryovers under a health FSA, the amount of the carryover was capped at $500 and that amount was not indexed for inflation.  In Notice 2020-33, the IRS has modified that rule and has provided that the maximum carryover amount will be 20% of the applicable limit on salary reduction contributions to health FSAs under Section 125(i) of the Internal Revenue Code (the “Code”).  Because the amount applicable under Section 125(i) is indexed for inflation, the maximum carryover amount will now also be indexed for inflation.  In light of this change, the maximum carryover amount for plan years starting in 2020 will be $550.

Note:  The increase in the amount of a carryover available under a health FSA is OPTIONAL.  An employer is not required to adopt this change.  However, an employer that wishes to make this change must AMEND its plan (unless the plan already incorporates the increase by reference to the Code).  In general, a carryover provision can be added or changed so long as the amendment is adopted by the last day of the plan year with respect to which the carryover applies.  However, an amendment made with respect to the 2020 plan year must be adopted no later than December 31, 2021 (with retroactive effect), provided the employer informs all employees eligible to participate in the plan of the change when the change is implemented.

Premium Reimbursement Rules

Under the general rule, a health plan may reimburse an eligible expense only when that expense is incurred.  An expense is incurred when the individual is provided the medical care that gives rise to the expense (not when the expense is billed and paid). That rule has created administration issues for plans, such as HRAs, individual coverage HRAs (ICHRA), and individual premium reimbursement/payment features of Section 125 cafeteria plans, that reimburse premiums for health insurance because typically premiums are paid in advance (i.e., prior to when the coverage is provided to the participant).  Notice 2020-33 simplifies the administration of these reimbursements by providing that a plan can treat a premium for health coverage as having been incurred on one of the following three dates:  (1) the first day of each month of coverage on a pro rata basis; (2) the first day of the coverage period; or (3) the date on which the premium is paid.

Note:  This change to the rules regarding when health premiums are incurred is OPTIONAL.  An employer is free to design its plan to include restrictions on which expenses are incurred for purposes of providing reimbursements.  In the absence of such restrictions in the plan, this new rule regarding when premiums are incurred might be automatically incorporated in the plan.  Nevertheless, plan documentation (written plan documents and Summary Plan Descriptions) should be reviewed and adjusted as needed.  Furthermore, participants should be notified of the new rule.

Action Items: 

• Employers should evaluate which of the changes described in this Alert they want to implement. As indicated, most of the changes are optional.
• Employers must notify eligible employees and plan participants of any changes implemented by the employer and apply the changes on a uniform basis. Ultimately, the changes must be reflected in a written plan amendment adopted by the applicable deadlines.
• Employers and third party administrators must adjust administrative practices to take into account the changes made.

 

Please contact us if you have any questions and/or would like assistance with implementing any of the forgoing action items.