As part of its response to the coronavirus pandemic, the IRS announced in IRS Notice 2020-29 that it is permitting increased flexibility for midyear elections under a Sec. 125 cafeteria plan during calendar year 2020 for employer-sponsored health coverage, health flexible spending arrangements (FSAs), and dependent care assistance programs.
Elections under a Sec. 125 cafeteria plan generally are irrevocable and must be made before the first day of the plan year. A Sec. 125 cafeteria plan may permit an employee to revoke an election during a period of coverage and to make a new election under certain circumstances, such as if the employee experiences a change in status or there are significant changes in the cost of coverage. Because many employees will not meet that standard as a result of the pandemic, the IRS has decided to give employers the option to allow employees to change their elections mid-year.
IRS Notice 2020-29 may permit employees who are eligible to make 2020 salary reduction contributions under the plan mid-year as follows:
- For employer-sponsored health coverage, (1) make a new election on a prospective basis if the employee initially declined to elect employer-sponsored health coverage; (2) revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer 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;
- Revoke an election, make a new election, or decrease or increase an existing election applicable to a health FSA on a prospective basis; and
- Revoke an election, make a new election, or decrease or increase an existing election regarding a dependent care assistance program on a prospective basis.
Notice 2020-29 also gives increased flexibility for grace periods to apply unused amounts in health FSAs at the end of a 2019 plan year towards medical care expenses incurred through Dec. 31, 2020. A similar provision applies to unused amounts in dependent care assistance programs to dependent care expenses incurred through Dec. 31, 2020.
For amounts that are unused and that remain in a health FSA or a dependent care assistance program under the Sec. 125 cafeteria plan as of the end of a grace period or plan year ending in 2020, a Sec. 125 cafeteria plan may also permit employees to apply those unused amounts to pay or reimburse medical care expenses or dependent care expenses, respectively, incurred through Dec. 31, 2020, as well.