On May 12, the IRS released two notices allowing employees during 2020 to make changes to their enrollments in employer-sponsored health plans and to adjust pretax contributions to health flexible spending accounts (health FSAs) and dependent care flexible spending accounts (dependent care FSAs).
These changes, which apply only to plan year 2020, had been advocated by the Society for Human Resource Management (SHRM).
Health Plan Enrollments and Elections
In IRS Notice 2020-29, the agency said it would allow increased flexibility regarding midyear election changes for group health plans and FSAs.For instance, employees will now be able to make these changes:
- Enroll in employer-sponsored health plans during the plan year by making a new election. Employees may do so even if they had previously declined enrollment.
- Switch health plans or tiers within plans.Employees will be able to drop current coverage to enroll in different coverage offered by the same employer or change from single coverage to family coverage, for instance.
Although allowing employees to make these newly permitted plan changes during 2020 is optional for employers, many “will want to enable employees to enroll or revoke an enrollment election in various group health plan options,” noted Gary Kushner, president and CEO of HR and benefits consulting firm Kushner & Company in Portage, Mich.
David Speier, managing director for benefits accounts at consultancy Willis Towers Watson, said that allowing midyear plan elections could mean that employees will “switch to a plan that increases the employer’s financial burden during a difficult time,” for instance if employees opt for a low-deductible plan with higher premiums. However, other midyear changes could reduce an employer’s cost, “as when employees elected a dental plan but now opt out because they can’t use it this year,” Speier added.
FSA Enrollments and Elections
For both health FSAs and dependent care FSAs (used to fund caregiving expenses with pretax dollars), employees will be able to enroll, drop coverage, and increase (within the annual limit) or decrease payroll-deducted contributions during 2020.
“This is welcome relief, and many employers will consider providing it under their plans,” said William Sweetnam, legislative and technical director at the Employers Council on Flexible Compensation, which represents sponsors of account-based benefit plans.
Julie Stone, North America co-leader for the health management practice at Willis Towers Watson, explained, “At a time where some people may be cash-strapped, deferring elective procedures, new eyeglasses, etc., may well make sense, and so being able to suspend contributions to a health FSA or limited purpose dental/vision FSA is important.”
Kushner blogged, “Many employers would embrace enabling dependent care FSA participants to increase (or more likely decrease or revoke) their elections if schools and day care centers are closed, or if the employee is working from home.”
However, for any FSA, “employers may be more reluctant to enable employees to decrease or revoke their election if they’ve already claimed their previous full election amount and payments have been disbursed,” he added.
In 2020, employees can contribute $2,750 to a health FSA, including to a limited-purpose FSA restricted to dental and vision care services, which can be used in tandem with a health savings account (HSA).
The dependent care FSA maximum, which is set by statute and not adjusted annually for inflation, is $5,000 a year for individuals or married couples filing jointly, or $2,500 for a married person filing separately, subject to earned income limits.
FSA Use-It-or-Lose-It Rules
For plan years ending before Dec. 31, 2020, employers can amend a health or dependent care FSA plan to permit participants to “spend down” through year-end 2020 any remaining amounts from 2019 that would otherwise be forfeited. Employers can allow claims incurred at any time in 2020 to be applied to any remaining 2019 FSA balances.
Sweetnam noted an issue with this extension that could complicate matters for employees who had a 2019 health FSA and were newly enrolled in an HSA in 2020: An employer that carries over unused funds from a prior year to a current year under a general-purpose health FSA will not be eligible for HSA contributions for the entire current plan year.
“Carryover 2019 FSA amounts can be used to pay for health care expenses below the deductible in 2020, thus making participants [with both carryover health FSAs and new HSAs] ineligible to make HSA contributions in 2020,” Sweetnam said. “Consequently, employers may want to consider the impact on HSAs as they decide whether to extend the claims period for health FSAs.”
To avoid this issue, employers can allow 2019 carryover health FSA funds to be transferred an HSA-compatible, limited-purpose FSA, which can be used only for vision care and dental expenses.
Increased Carryover Cap
IRS Notice 2020-33, also released May 12, increases the amount of funds that health FSA participants can carry over without penalty at the end of the year for plans that use the carryover option. The carryover amount will now be indexed for inflation by making it 20 percent of the allowable payroll-deductible contribution limit, which is $2,750 for plan year 2020.
As a result, the maximum unused amount from a plan year starting in 2020 allowed to be carried over to the immediately following plan year beginning in 2021 is $550, up from the previous limit of $500.
While Sweetnam called the inflation adjustment helpful, he noted that many have advocated allowing much larger carryover amounts or eliminating the use-it-or-lose-it rule completely. “I think that the limited amount of the increase means that the IRS and Treasury Department were concerned that they did not have the authority under the Internal Revenue Code to provide for a larger carryover amount,” he suggested.
Notice 2020-33 also clarified that the previously provided temporary relief for high-deductible health plans (permitting them to cover COVID-19 related services at no cost) may be applied retroactively to Jan. 1, 2020.
| Different Plans Had Different RulesSome midyear elective-contribution changes have long been permitted. For instance, changes to payroll deductions to fund 401(k) or similar defined contribution retirement plans, HSAs, and commuter benefit plans can be made at any time for any reason, although employers may limit changes to once a month for administrative purposes.For employer-sponsored group health, dental and vision plans, however, changes are restricted. Under tax code Section 125, elective contributions typically can be changed only within 30 days of a qualifying event as determined by the IRS, such as marriage, divorce, job change, birth or adoption of a child, or when a dependent child reaches age 26. The new guidance carves out an exception for changes made during 2020 due to the COVID-19 pandemic. |
SHRM Advocacy
“As employers and their employees navigate the current crisis, workplace health care has emerged as a critical issue requiring flexibility,” Emily M. Dickens, SHRM corporate secretary, chief of staff and head of government affairs, wrote in an April 16 letter to IRS Commissioner Charles Rettig.
SHRM advocated flexibility on rollover provisions, time frames for claims, and midyear election changes to FSAs due to employees’ evolving health care and child care needs as a result of COVID-19.
SHRM also requested a one-time, pandemic-related window for employees who may have declined coverage at the start of the calendar year to enroll in an employer’s health plan, as the IRS is now allowing for 2020. “Many employers are struggling with employee requests for election changes and whether such a change would be permitted under IRS guidance,” Dickens wrote.
In addition, SHRM asked the IRS to increase the annual $500 carryover limit for health FSAs for plans that use the carryover option.
“Many employees … carefully contemplated a health care FSA election based on [elective] medical procedures that will no longer occur,” Dickens pointed out, and these employees should not be penalized because their anticipated annual medical expense estimates need to be adjusted.
