New Opportunities for Health Flexible Spending Arrangements and Cafeteria Plans

In response to the COVID-19 crisis, Congress and the IRS have provided more flexibility and expanded opportunities for employees to utilize health flexible spending arrangements and to adjust cafeteria plan elections.

Expansion of Health Flexible Spending Arrangements (FSA) Reimbursable Expenses

The CARES Act amended Internal Revenue Code section 106(f), effective January 1, 2020, to allow health flexible spending arrangements to reimburse over-the-counter medications without a prescription and menstrual care products.

Mid-Year Election Changes

IRS Notice 2020-29 provides for the following new mid-year election changes for the 2020 calendar year only:

1. With respect to health coverage:
   1. make a new election on a prospective basis, if the employee initially declined health coverage;
   2. revoke an existing election and make a new election to enroll in different health coverage on a prospective basis; and
   3. revoke an existing election on a prospective basis, provided that the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer.
2. Revoke an election, make a new election, or decrease or increase an existing election applicable to a health FSA on a prospective basis; and
3. Revoke an election, make a new election, or decrease or increase an existing election regarding a dependent care assistance program on a prospective basis.

An employee may not make an election to revoke an existing election of health coverage unless he or she provides a written statement that the employee is enrolled, or immediately will enroll, in other comprehensive health coverage not sponsored by the employer.  Notice 2020-29 provides a model statement that may be used for this purpose.

The mid-year election changes allowed by Notice 2020-29 are voluntary, and they may be limited.  For example, to avoid adverse selection, a plan sponsor may restrict the ability to change from single coverage to family coverage or from a low-coverage option to a high-coverage option.

The amendment deadline for this change is December 31, 2021.

Grace Period Extension Through December 31, 2020

Notice 2020-29 provides that a plan may be amended to allow employees to apply unused amounts remaining in a health FSA or a dependent care assistance program as of the end of a grace period ending in 2020 or a plan year ending in 2020 to pay or reimburse expenses incurred for the same qualified benefit through December 31, 2020.

The amendment deadline for this change is December 31, 2021.

Health FSA Carryover

IRS Notice 2020-33 increases the Health FSA carry-over amount from $500 to $550. 

The amendment deadline for this change is December 31, 2021.

Williams Mullen continues to monitor COVID-19 developments. Visit our COVID-19 resources page here for more information.

Please note: This alert contains general, condensed summaries of actual legal matters, statutes and opinions for information purposes. It is not meant to be and should not be construed as legal advice. Readers with particular needs on specific issues should retain the services of competent counsel. 

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