IRS Issues Guidance Related to Changes in Elections, Grace Periods, and Carryovers

As part of its ongoing efforts to help those who have been impacted by the health care and economic fallout from the Covid-19 pandemic, the IRS recently released two pieces of sub-regulatory guidance making it easier for participants to change their cafeteria plan elections and not forfeit funds in their flexible spending arrangements (FSAs). Notice 2020-29 provides relief for cafeteria plans in response to the current Covid-19 pandemic, and Notice 2020-33 provides a permanent increase to the carryover limit for
health FSAs.

Due to the Covid-19 pandemic, many employees’ reasonable expectations regarding medical and childcare expenses have significantly changed since they made their coverage elections for this year. For example, an employee may have waived health coverage for a child and now realized the child needs coverage because the child is home from college. Or, the employee may incur much less in medical and dependent care expenses this year because doctor, dentist, physical therapist, and childcare centers have been closed for months, with no signs of widespread or sustained re-openings in much of the country. On the other hand, an employee may incur significantly more in medical and dependent care expenses because he or she had Covid-19 or needed childcare because of school closures.

Notice 2020-29 provides some much-needed flexibility for mid-year election changes under an employer’s cafeteria plan to help account for the fallout from the pandemic. It also extends the periods after which participants must forfeit FSA balances. This is welcome news for employers that want to be able to accommodate their employees’ needs without running afoul of the cafeteria plan rules.

Unrelated to Covid-19, Notice 2020-33 provides additional welcome relief in the form of a modest increase in the carryover limit of unused amounts remaining as of the end of a plan year in a health FSA. Notice 2020-33 also clarifies the ability of a health reimbursement arrangement (HRA) to reimburse premium expenses incurred prior to the beginning of the plan year for coverage provided during the plan year.

Groom principals Katie Amin and Rachel Leiser Levy summarize the provisions of the two Notices in the Tax Management Compensation Planning Journal article, “IRS Issues Guidance Related to Changes in Elections, Grace Periods, and Carryovers”. To read the article, click here.


Reproduced with permission from Copyright 2020 The Bureau of National Affairs, Inc. (800-372-1033) bloombergindustry.com.