IRS Increases Flexibility for Employer Health Plans, FSAs and Dependent Care Programs

On May 13, 2020, the IRS released new guidance giving employers greater flexibility in the administration of sponsored Sec. 125 cafeteria plans (including health insurance, flexible spending and dependent care plans), whether insured or self-insured. Under the new rules, an employer may amend plan documents to permit employees to make new health care elections or change current elections mid-year on a prospective basis (outside of the customary open enrollment period). An employer may also give employees more time to apply unused medical flexible spending and dependent care account dollars, recognizing that cancellation of medical procedures and school/day care closures during the pandemic have dramatically affected employee balances in these accounts.

Under the new guidance, employers may permit eligible employees covered by a Sec. 125 cafeteria plan to do the following:

  • Employer Sponsored Health Plans:
    • Allow employees to enroll in health care insurance plan on a prospective basis, even if the employee initially declined to elect coverage under the employer-sponsored health coverage.
    • Revoke an existing election and make a new election to enroll in different coverage sponsored by the same employer on a prospective basis.
    • Revoke an existing election, provided that the employee attests in writing that they are enrolled, or will immediately enroll, in other health coverage not sponsored by the employer. (The guidance provides a sample attestation.)
  • Medical Flexible Spending Plans and Dependent Care Spending Plans:
    • Revoke an election, make a new election, or decrease or increase an existing election applicable to a health flexible savings account or dependent care assistance program. (Employers can limit the election changes to be no less than amounts already reimbursed to the employee.)
    • Revise their plans to provide options for employees who have unused amounts at the end of the 2020 calendar year in one of two ways:
      • Grace Period: Allows plan participants to incur expenses and use the remaining funds in the account no later than March 15, 2021.
      • Carry over: Allows plan participants to carry over amounts up to $550 into their plan for the 2021 year.
      • Note: An employer would need to choose either the Grace Period or the Carry Over option, they cannot do both.

Keep in mind that the increased flexibility allowed by the new IRS guidance is optional, not required. To implement any of the above changes, an employer must adopt amendment(s) to applicable Sec. 125 cafeteria plans on or before December 31, 2021, and those amendments may be effective retroactively to January 1, 2020. The employer must also inform all eligible employees of any changes to the Sec. 125 cafeteria plans. Employers should work closely with their benefits brokers and health plan providers to make any of these changes.

The attorneys and HR professionals at Lake Effect HR & Law are ready and willing to help. Contact us at info@le-hrlaw.com or 1-844-333-5253.

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