IRS Guidance for Employers and Employees: Cafeteria Plans and the COVID-19 Crisis

Although the coronavirus pandemic has rendered eating in a cafeteria a distant memory, recent IRS guidance to address the effects of the pandemic on enrollment in health and dependent care plans has brought cafeteria plans front and center to the attention of employers and employees.

Under IRS Notice 2020-29, an employer can amend its cafeteria plan to allow employees to make the changes to their elections described below, regardless of whether the employee has experienced a covered event that would otherwise allow for these changes. The covered events include marriage and divorce, birth or adoption of a child, gain or loss of eligibility to participate in a plan due to an employment event, and changes to the cost or coverage of benefit plans.

For example, an employee made a salary reduction contribution election in December 2019 in a certain amount to his or her health flexible spending account, based on the expectation of having an elective surgical procedure in April 2020. Under a stay-at-home order, elective procedures are not permitted. In addition, once the state reopens and elective procedures are permitted, the employee would prefer not having the procedure in a hospital. Since the employee has not experienced a covered event, the employee cannot elect to reduce the amount of his or her election. Under the IRS guidance, the employee can make this election prospectively.

An employer can amend its cafeteria plan to allow employees to:

• make a new election for employer-sponsored health coverage on a prospective basis if the employee initially declined to elect employer-sponsored health coverage;
• revoke an existing election for employer-sponsored health coverage and make a new election to enroll on a prospective basis in different health coverage sponsored by the same employer (including changing enrollment from employee-only coverage to family coverage);
• revoke an existing election for employer-sponsored health coverage 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—for example, the employee obtains coverage under the plan of a spouse or domestic partner;
• revoke an election, make a new election, or decrease or increase an existing election regarding a health flexible spending account (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 flexible spending account (a “dependent care FSA”) on a prospective basis.

Under the IRS guidance, the employee does not have to provide a reason for making a change to his or her election, nor does the employee have to show that he or she has been affected by the pandemic. Since the changes are prospective, the employee cannot seek a refund of contributions made before the employer amended the plan. In addition, with respect to health FSAs and dependent care FSAs, employers can limit mid-year elections to amounts no less than amounts already reimbursed. This rule prevents employees who have already been reimbursed up to their existing election amounts from reducing their contributions to zero.

The employer has the discretion whether to make any of these amendments. The employer may determine the extent to which the election changes are permitted as long as any changes are applied on a prospective basis and do not run afoul of the nondiscrimination rules for cafeteria plans. Examples of permissible limitations are the time period during which an employee can make election changes, whether to permit all new health coverage enrollments, and whether new enrollments are limited to changes in coverage tiers, such as employee-only to family coverage.

In determining the extent to which election changes are permitted, an employer can consider the potential for adverse selection of health coverage by employees. To prevent adverse selection, an employer may wish to limit elections to circumstances in which an employee’s coverage will be increased or improved as a result of the election (for example, by electing to switch from employee-only coverage to family coverage, or from a low option plan covering only in-network expenses to a high option plan covering expenses in or out of network).

The IRS notice provides that the relief may be applied retroactively to periods before the May 12, 2020 issuance date of the notice and on or after January 1, 2020 to address a cafeteria plan that, before the issuance of the notice, permitted mid-year election changes for employer-sponsored health coverage, health FSAs, or dependent care FSAs that otherwise are consistent with the requirements for the relief provided by the notice.

Extension of Claims Period for Health FSAs and Dependent Care FSAs

IRS Notice 2020-29 also permits an employer to amend its cafeteria plan to allow participants to use amounts remaining in health FSAs or dependent care FSAs after the end of a grace period that ends in 2020, or a plan year that ends in 2020. For example, this relief applies to a calendar year plan that has a grace period ending on March 15, 2020. The participant can use the remaining amounts to pay expenses incurred through December 31, 2020.

The extended claims period is available to a cafeteria plan that has a grace period and to a cafeteria plan that provides a carryover (limited to $500 for plan years beginning before January 1, 2020). As a general rule, a health FSA cannot have both a grace period and a carryover. Since the extended claims period is, in effect, an extended grace period, the IRS notice provides an exception to the general rule.

An employer should be wary of making this amendment if the employer sponsors a high deductible health plan with a health savings account. The extended claims period in a general purpose health FSA is an extension of coverage that is not a high deductible health plan for determining an employee’s ability to make or receive pretax contributions to a health savings account. Employees who have unused amounts remaining at the end of the grace period or plan year and are allowed to use these amounts for expenses incurred through December 31, 2020 will not be permitted to make or receive pretax health savings account contributions for the remainder of 2020.

Plan Amendments

An employer that makes any of the changes permitted by the IRS notice must adopt a written plan amendment by December 31, 2021. The amendment can be effective retroactive to January 1, 2020 provided the employer operates the cafeteria plan in accordance with the IRS notice. In addition, the employer must provide prompt written notice of the changes to all employees eligible to participate in the cafeteria plan. The employer will also need to update the summary plan description or summary of material modifications for the changes. Finally, the employer should review its group health plan to see whether it needs to amend the plan to provide for mid-year enrollments and changes.

High Deductible Health Plans

IRS Notice 2020-29 clarifies prior IRS guidance with respect to services covered by high deductible health plans. First, high deductible health plans can cover medical services and items relating to testing and treatment of COVID-19 before satisfying the plan’s deductible. Testing and treatment include the panel of diagnostic tests for influenza A & B, norovirus and other coronaviruses, and respiratory syncytial virus, as well as any items or services required to be covered with zero cost sharing under the Family First Coronavirus Response Act and the CARES Act. This relief applies to services and supplies provided on or after January 1, 2020.

Second, under the CARES Act, employees can make pretax contributions to health savings accounts if the plan provides telehealth or other remote care services without a deductible, or if the employees have access to telehealth or other remote care services outside the plan. This relief applies to services provided on or after January 1, 2020 with respect to plan years beginning on or before December 31, 2021.