New IRS Guidance Provides Additional Relief for Section 125 & Flexible Spending Accounts (FSAs)

In a continued effort to provide certain relief to plan participants in the wake of COVID-19, the Internal Revenue Service (IRS) has released two new sets of guidance which increase the flexibility of administering Section 125 cafeteria plans. Qualifying events for adding, dropping and changing coverage, extended claims periods and rollover amounts on flexible spending accounts (FSAs) have the opportunity to be modified under Notice 2020-29 and Notice 2020-33

These options remain at the discretion of the employer, who may choose to add all or some of the relief measures by amending their plan(s) to adopt the following changes:

Notice 2020-29: Provides temporary flexibility to permit employees to make prospective mid-year election changes during calendar year 2020 (health coverage, health FSA and dependent care).

 Mid-year election changes:

  • Make a new election for employer-sponsored health coverage, if initially declined.
  • Revoke an existing election and make a new election to enroll in a different health coverage plan by the same employer (another plan option, different tier, etc.)
  • Revoke an existing election for employer-sponsored health coverage, only when the employee provides evidence, or will provide evidence in writing, that they are enrolled in other health coverage (sample language is provided in the notice, on page 8)
  • Revoke, add, increase or decrease an existing health FSA election, including limited-purpose FSA
  • Revoke, add, increase or decrease an existing Dependent Care election

Extending claims period for health FSAs and dependent care

  • Unused amounts remaining in a health FSA or Dependent Care account as of the end of a grace period ending in 2020 or a plan year ending in 2020 may be used to reimburse expenses incurred for that account through December 31, 2020.

Notice 2020-33: Increases the carryover limit of unused amounts remaining as of the end of a plan year in a health FSA.

The maximum unused amount from a plan year starting in 2020 is allowed to be carried over immediately to the following plan year beginning in 2021 which is now $550, up from $500.

An employer that decides to amend one or more of its Section 125 cafeteria plans to provide for these mid-year election changes, extended claims period or an increase in the carryover of unused amounts to the following year, must adopt a plan amendment and provide notification to all eligible plan participants.

Rose & Kiernan, Inc. continues to monitor and relay information related to the many aspects of dealing with COVID-19 and the workplace. If you have any questions about this topic, please contact us here or by calling (800) 242-4433. You can also view our COVID-19 resources page for important information about Rose & Kiernan’s response to the virus outbreak.

Please note that news and events surrounding the COVID-19 pandemic are changing quickly. The information provided in this blog post represents where things stand on the date of publication.

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