ErisaALERT June-2020 IRS Notices

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Key takeaways of IRS Notice 2020-29

• Mid-year cafeteria plan elections permitted in response to COVID-19.
• Participants may revoke or change existing elections.
• Revocation of health coverage requires attestation regarding availability of other coverage.
• Participants who previously declined coverage may elect coverage.
• Plans can provide an extended period for unused amounts remaining in a flexible spending account through December 31, 2020.  This applies to unused amounts as the end of a grace period ending in 2020. Such amounts may be used for expenses incurred for the same qualified benefit through December 31, 2020. This will be of interest to non-calendar year plans.

Key takeaways of IRS Notice 2020-33

• Indexes the FSA carryover limit.  The new carryover limit for 2021 is $550.
• Permits reimbursements of premiums under an ICHRA paid before beginning of a plan year for coverage provided during a plan year (e.g., January 2021 premiums paid in December 2020).
• Mentions IRS Notice 2020-29 which permits midyear election changes (i.e., begin or revoke deferrals on a prospective basis only); plan amendment needed no later than December 31, 2021.
• Plans must be amended by December 31, 2021 provided that the plan operates in accordance with this Notice and Notice 2020-29.

Background

The Notices summarize the following basic rules:

A run-out period is a period immediately following the end of a plan year during which a participant can submit a claim for reimbursement of expenses incurred during the plan year or in the case of a plan year using a grace period, the period immediately follow the grace period.

A grace period permits participants to apply unused amounts to pay expenses during a period of two months and 15 days immediately following the end of a plan year.

The permissive carryover rule permits up to $500 of any unused amount in a health FSA at the end of the plan year to be used for expenses incurred in the immediately following plan year. A plan cannot have a carry over and a grace period.

A health care FSA may permt either a grace period or a carryover but not both.

IRS Notice 2020 -29

In response to COVID-19, an employer may amend its cafeteria plan to allow eligible employees to prospectively:

• Change their election
• Revoke their election with attestation that the employee is enrolled or will enroll in other health coverage not sponsored by the employer (model attestation language provided in the Notice)
• Begin contributing for health care coverage if such coverage was previously declined

The employer is not required to provided unlimited election changes and may, in its discretion, determine the extent of the allowable changes.

IRS Notice 2020-33

The Notice indexes the $500 carryover limit to 20% of the IRC 125(i) limit. The 2020 carryover to 2021 is $550. The plan can be amended to permit the increased carryover any time on or before the last day of the plan year that begins in 2021.

The Notice provides of rule of administrative convenience that would permit ICHRA amounts contributed by salary reduction from the last month of one IRC 125 cafeteria plan year to pay accident and health insurance premiums for insurance during the first month of the immediately following plan year if done a uniform and consistent basis with respect toa all participants.

Generally, irrevocable IRC 125 elections must be made before the start of the plan yar. This Notice mentions IRS Notice 2020-29, which permits individuals to increase or begin FSA contributions due to the increase of the carryover, and provides that increases in FSA contributions may apply on a prospective basis during 2020.

Plan Sponsor to do’s:

Decide if you will take advantage of the increased carryover and mid-year elections. Check with your insurance carrier and/or stop loss provider to confirm that they will permit these changes. Check with your FSA administrator to ensure they are ready and able to implement the changes.  Communicate to participants and remember to amend your plan on or before 2021. Document actions taken with respect to these Notices.