New Options to Change Section 125 Employee Benefits Plans due to COVID-19

On May 12, 2020, the IRS released two new regulations, allowing temporary changes to Section 125 Cafeteria Plans. The guidance provides significant flexibility and allows employers to make certain changes to their Section 125 plan retroactive to as early as January 1, 2020. All changes are voluntary and can be adopted or limited based on what will work best for your organization.

The full guidance for high deductible health plans from the IRS is available here and the guidance for flexible spending arrangements can be found here.

Under this new guidance, employers are permitted to amend their Section 125 plan allowing mid-year election changes for the 2020 calendar year. This would apply to employer-sponsored health plans, Health Flexible Spending Arrangements (FSAs), and Dependent Care Assistance Plans (DCAPs). Employees and their dependents do not need to be directly affected by COVID-19 to take advantage of this flexibility.

This is an optional amendment and employers are not required to adopt these provisions. The intention behind the new guidance is to allow employers and employees an opportunity to adapt to COVID-19 and the associated challenges. If an employer chooses to implement these changes, it would allow employees to make the following changes to their employer-sponsored health plan:

1. Employees may enroll in the plan even if they initially declined the coverage;
2. Employees may alter their existing election and change plan types if their employer offers more than one option; or
3. Employees may terminate their coverage on the plan so long as they provide a written attestation that they are, or will immediately be, enrolled in another health care plan not offered by the employer.
4.      The IRS has provided a sample attestation that employers may use:

“Name: _______________________ (and other identifying information requested by the employer for administrative purposes). I attest that I am enrolled in, or immediately will enroll in, one of the following types of coverage: (1) employer-sponsored health coverage through the employer of my spouse or parent; (2) individual health insurance coverage enrolled in through the Health Insurance Marketplace (also known as the Health Insurance Exchange); (3) Medicaid; (4) Medicare; (5) TRICARE; (6) Civilian Health and Medical Program of the Department of Veterans Affairs (CHAMPVA); or (7) other coverage that provides comprehensive health benefits (for example, health insurance purchased directly from an insurance company or health insurance provided through a student health plan).

Signature: ______________________”

Employees may find themselves needing to bolster their Flexible Spending Arrangements (FSA) or Dependent Care Assistance Plans (DCAPs). If adopted by the employer, the new guidance allows election changes and grace periods. Employers are not required to provide unlimited election changes and may implement restrictions that best suit their workforce and culture.

1. Employees may prospectively revoke their election, make a new election, or decrease/increase an existing election regardless of whether or not they’ve had a qualifying event.
2. Employees who have funds that will be forfeited at the end of a grace period in 2020, or a plan that is ending in 2020, will be allowed to use the entire amount of funds for qualifying expenses incurred through December 31, 2020.

NOTE: Employees who have since enrolled in an HSA/HDHP will lose their HSA eligibility during the Extended Period if the employer takes advantage of this flexibility and will no longer be allowed to contribute to their HSA unless they have amended their FSA to have a mandatory conversion to Limited Purpose FSA during the grace period.

A time extension for incurring claims is available to Section 125 plans that have a grace period, as well as to those who provide for a carryover. The ability to have both this extension as well as a carryover, however, is only temporary.

Employers should consider developing a strategy around election modifications, including the number, the types, and the timeline during which changes can be made. It is highly recommended that employers limit mid-year FSA election adjustments to amounts that are no less than the amounts that have already been reimbursed for the FSA and DCAP.

The IRS also provided clarification that the exemption from the HSA/HDHP plan rules for telehealth and the coverage of expenses related to testing and/or treatment of COVID-19 without meeting the HSA/HDHP deductible may be applied retroactively to January 1, 2020.

All of the above provisions apply to both fully insured and self-funded plans.

Under this notice, the FSA carryover amount of $500 can be increased to be equal to 20% of the maximum salary reduction contribution. For 2020, the amount that may be carried over into 2021 is now $550, 20% of $2,750 – the indexed 2020 limit. Employers who wish to implement the higher carryover maximum must do so before the last day of the plan year from which the amounts will be carried over. Plans that begin in 2020 must include language that incorporates the increase. If the plan has already been written, it must be amended before December 31, 2021, and may be effective retroactively to January 1, 2020.

If you are unsure how this new guidance affects your business’s coverage or need assistance in making any of these changes, please reach out to your Aldrich Benefits Advisor today.

The COVID-19 pandemic continues to affect businesses in a variety of ways. For additional employer resources, check out our resource center.

The information provided on this website does not, and is not intended to, constitute legal advice; instead, all information, content, and materials available on this site are for general informational purposes only. Readers of this website should contact their attorney to obtain advice with respect to any particular legal matter.