By Peter Reiss
IRS Allows New Flexibility in Section 125 Cafeteria Plan Elections
In response to the 2019 Coronavirus outbreak, the IRS has issued Notice 2020-29, which offers taxpayers new opportunities to make, revoke or change previously irrevocable elections under Section 125 employer-sponsored health coverage, health Flexible Spending Arrangements (FSAs) and dependent care assistance programs.
§125 Cafeteria Plans are employee benefit plans maintained by an employer under which all participants are employees and all participants may choose among two or more benefits consisting of cash and “qualified benefits”. Like 401 (k) contributions, these benefits are excludible from the employee’s gross income under the Internal Revenue Code (IRC). Possible benefits may include employer-provided accident and health plans, health FSAs and dependent care assistance programs.
Employee elections under these plans generally are irrevocable and must be made prior to the first day of the plan year, e.g. no later than December 31, 2019 for the 2020 plan year. Specific employer plan provisions may allow or prohibit certain mid-year elections under certain circumstances.
The IRS Notice is very detailed, but in general it allows employers to revise their plans (i) to permit employees who initially declined coverage an opportunity to elect coverage, (ii) to allow already enrolled employees to change the coverage they initially elected, and (iii) to allow employees to increase or decrease amounts in their health FSAs, and to increase or decrease amounts allocated dependent care assistance programs. Normally, none of these actions would be permitted.
Normally, unused amounts remaining in an employee’s account at the end of a plan year (sometimes plus a “grace period” of, for example, 2 ½ months) are forfeited (unusable). The Notice allows employers to amend plans to extend the period within which an unused allowance from a prior year may be used to pay or reimburse medical care expenses or dependent care expenses. For example, an employee who had an unused balance of $1000 in her plan at the end of 2019 might lose that amount if it was not used by March 15, 2020. The Notice permits the plan to be amended to extend until December 31, 2020 the ability to use the unused amount. This is particularly helpful since some procedures that may have been scheduled for the early months of 2020 have been postponed due to the coronavirus pandemic through no fault of the patient.
This is just an overview of the many provisions in the Notice, which provides welcome relief to the many employees covered by these plans who have been adversely affected by the health emergency.
This article is not legal advice and is provided for informational purposes only. Actual legal advice can only be provided after consultation by an attorney licensed in your jurisdiction.