IRS Provides COVID-Related Cafeteria Plan Relief, Clarifies Recent HDHP Changes

In response to the 2019 novel coronavirus (COVID-19) outbreak, the IRS has issued a notice allowing cafeteria plans to permit certain prospective midyear election changes. The notice also allows cafeteria plans to provide an extended period for using amounts remaining in a health FSA or DCAP to pay or reimburse medical or dependent care expenses, and it provides clarifications regarding recent COVID-related relief for high-deductible health plans (HDHPs). Here are highlights:

• Election Change Relief. Cafeteria plans can be amended to allow the following prospective election changes during calendar year 2020: (1) new elections for employer-sponsored health coverage by employees who initially declined coverage; (2) elections to enroll in different health coverage sponsored by the same employer (including a change from self-only to family coverage); (3) revocation of existing elections for employer-sponsored health coverage, with a written attestation that the employee is or immediately will be enrolled in other “comprehensive” health coverage not sponsored by the employer; or (4) health FSA or DCAP election changes (including revocations, increases, decreases, or new elections). These additional election changes are permitted regardless of whether the basis for the change meets the requirements of the IRS election change regulations. The relief may be applied retroactively to periods between January 1, 2020, and the notice’s issue date to address plans that permitted election changes before the issue date that otherwise met the notice’s requirements. Employers utilizing the relief can determine the extent to which the additional elections will be permitted (considering the potential for adverse selection), so long as any permitted changes are nondiscriminatory, and may rely on an employee’s attestation regarding other coverage absent actual knowledge to the contrary (sample language is provided). Employers are also reminded of the application of other laws (e.g., ERISA’s notice requirements).
• Health FSA and DCAP Claims. Plans may be amended to permit employees to use amounts remaining in a health FSA or DCAP at the end of a plan year or grace period ending in 2020 to pay or reimburse expenses incurred through December 31, 2020. (As usual, health FSAs can only reimburse medical care expenses, and DCAPs can only reimburse dependent care expenses.) Examples illustrate how this relief applies to health FSAs that provide for carryovers. The notice cautions that if the period for incurring claims is extended under a health FSA that is not (or is not amended to be) HSA-compatible, an individual with unused amounts remaining at the end of a plan year or grace period ending in 2020 will not be eligible to contribute to an HSA during the extended period.
• Plan Amendments. Plan amendments are needed to utilize the election change or claims relief, as well as the increase in carryover amounts permitted under IRS Notice 2020-33 (see our Checkpoint article). Amendments for the 2020 plan year must be adopted on or before December 31, 2021, and may be effective retroactively to January 1, 2020, so long as the plan operates in accordance with applicable requirements and all eligible employees are informed of the changes.
• HDHP Relief. The notice explains that recent relief allowing HDHPs to provide benefits for COVID-19 testing and treatment on a no- or low-deductible basis (see our Checkpoint article) applies to reimbursements of expenses incurred on or after January 1, 2020, and provides clarifications regarding the items and services covered by this relief. The notice also clarifies that CARES Act relief regarding telehealth and other remote care services for plan years beginning on or before December 31, 2021 (see our Checkpoint article), applies with respect to services provided on or after January 1, 2020.

EBIA Comment: Employers and advisors have been seeking cafeteria plan relief in connection with the COVID-19 outbreak and will appreciate being able to offer additional flexibility to employees. Those who work with cafeteria plans will want to familiarize themselves with the relief in the notice, keeping in mind that the election change and claim provisions are discretionary and will require plan amendments. Note also that key cafeteria plan principles remain in place: retroactive election changes generally are not permitted, and unused contributions must be forfeited subject to limited exceptions (e.g., for health FSA carryovers or a grace period). For more information, see EBIA’s Cafeteria Plans manual at Sections XIV (“When May Participant Elections Be Changed?”) and XVI.B (“Grace Periods and the Use-or-Lose Rule”); see also EBIA’s Consumer-Driven Health Care manual at Sections X.H (“COVID-19 Testing and Treatment”) and X.I (“Telehealth and Other Remote Care Services”).

Contributing Editors: EBIA Staff.