On May 12, 2020, the IRS issued a notice permitting employers to allow the increased flexibility to make mid-year changes to their employer-sponsored health coverage, flexible spending accounts (FSAs), and dependent care assistance programs. Due to the impacts of the novel coronavirus, workers’ needs and access to health care and childcare have vastly changed, thus prompting the IRS’ response.
The new regulations from the IRS do not require employers to make these changes, but the employers can opt to make any of these changes to their cafeteria plans:
- Mid-year changes to group healthcare options: In a typical year, workers are only able to make changes to their healthcare plans during open-enrollment periods, or if they experience certain life-changing events, such as loss of coverage or a birth. Under the new guidelines, for 2020 only, employers can let their employees make changes mid-year that would remain effective for the rest of the calendar year.
- Mid-year changes to flexible spending accounts (FSAs): FSAs let workers set aside a certain amount of their pre-taxed salary into a specific account for healthcare and another account for childcare costs. When the healthcare cost or childcare expense is incurred, the employee gets reimbursed from the FSA, thus never owing tax on that expense. Usually, employees have to decide before the plan year begins how much money to set aside into their FSA, and they cannot make changes unless there is a specified life-changing event.
For the year 2020 only, employees are allowed to make mid-year changes to future FSA contributions for any reason (if the plan allows). This new rule is significant because amounts that employees put in these FSA accounts are “use it or lose it.” In other words, if employees set aside more in these FSA accounts than they spend in a year then they would lose any funds left in the account, unless the employer offers a grace period or carryover. The forfeited money goes to the employer. If an employer opts to change its plan for 2020, employees can reduce their remaining FSA contributions to ensure they don’t lose any money going into the FSA account.
These new rules are less relevant for dependent care accounts. Under the old guidance, parents could change their contributions mid-year if their childcare costs changed due to childcare options no longer offering services or because they no longer needed care.
- Slight increase of permitted FSA carryover amount: There are two exemptions for the “use it or lose it” rule for FSAs—for healthcare FSAs, employers can grant their workforce up to a 2.5-month grace period after the end of the plan year to spend their remaining funds (more on this below), or they can allow employees to roll over up to $500 from one year to the next. This IRS notice increases the amounts that employees can carry over from $500 up to $550.
- Extended grace period for certain plans: As mentioned above, FSA plans have a deadline for submitting expenses for reimbursement. These deadlines are typically some period of time (typically 2.5-month grace period) after the FSA plan year ends. After that deadline, if you haven’t submitted reimbursement requests for qualified expenses, your FSA money may be forfeited.
Under the more lenient IRS rules, if your plan has a grace period that ends or ended in 2020, under these new guidelines, your employer can give you until the end of 2020 to incur qualified expenses to get reimbursed from the account. For example, if your plan year ends June 30, 2020, and has a typical grace period that ends September 15, 2020, you could have until December 31, 2020, to spend the money and be reimbursed from the account. The extended grace period allowance does end in 2020, and your employer must put it into effect.
Navigating the seemingly countless changes from the IRS during this dynamic time is daunting. Our CRI professionals continuously monitor the latest guidance issued from the federal government and they are ready to help you learn how best to apply them to your personal or business situation. For more information on the novel coronavirus’ impacts to employers and workers, please check out CRI’s COVID-19 Resources.