IRS Allows Employees to Make Mid-Year Adjustments to FSAs as Part of CARES Act by Adam Cohen, CPA
Posted on May 21, 2020
by
Adam Cohen
One of the unanticipated consequences of the COVID-19 pandemic has been a change to the actual healthcare expenses employees estimated when they made irrevocable salary-reduction elections to employer-sponsored cafeteria plans. In response, the IRS has issued a series of guidance offering taxpayers more time and flexibility to make mid-year changes to flexible spending arrangements (FSAs) and dependent care assistance programs (DCAPs). Employers should consult with their advisors when adopting these amendments.
Mid-Year Election Changes Allowable for FSAs, DCAPs
IRS Notice 2020-29 allows employers to amend their Section 125 cafeteria plans and permit employees to take any of the following actions based on their unique needs and circumstances:
- Make an election to receive employer-sponsored health coverage on a prospective basis (for employees who previously declined coverage) or revoke an existing election for such coverage;
- Change enrollment to a different health plan;
- Make a new FSA or DCAP election or revoke an existing election;
- Decrease or increase an existing FSA or DCAP election on a prospective basis;
- Apply unused amounts remaining in an FSA or DCAP account at the end of 2020 to pay for medical care or dependent care expenses, respectively, incurred through Dec. 31, 2020;
- Apply earlier relief for high deductible health plans to cover expenses related to COVID-19.
Plan sponsors wishing to take advantage of these benefits and allow temporary, mid-year changes to cafeteria plans may do so immediately and retroactively to Jan. 1, 2020. However, the law grants them until Dec. 31, 2021, to formally adopt the changes to their plan documents.
FSA Carryover Limits Increased
IRS Notice 2020-33 increases the amount of unused FSA dollars that individuals may carry over from one plan year to the following plan year without penalty from $500 to $550. This provides FSA plan participants with some relief from the traditional “use it or lose it” rules for FSA dollars. Employers wishing to implement this increased FSA carryover benefit must formally adopt this amendment as part of their plan documents on or before the last day of the plan year.
More Flexibility in Timing of Individual Coverage Premiums
Notice 2020-33 also addresses individual coverage health reimbursement arrangements (HRAs), which are alternative forms of employer-sponsored health plans that reimburse plan participants for medical expenses, including monthly premiums, copayments and deductibles. More specifically, IRS guidance clarifies that workers who receive reimbursements for HRA plan premiums may continue to exclude those amounts from gross income, even when they pay those premiums before the first day of the plan year.
COVID-19 quarantines and business closures have forced many individuals to delay elective medical procedures and reevaluate existing child-care services, resulting in discrepancies between their expected and actual health and dependent care expenses. By granting these forms of relief to employers and their workers, the IRS is providing much-needed flexibility during a time of uncertainty. Employers should work with their plan administrators and tax advisors to stay up to date on continuing IRS guidance and ensure that they implement these benefits without raising regulatory red flags.
About the Author: Adam Cohen, CPA, is an associate director of Tax Services with Berkowitz Pollack Brant Advisors + CPAs, where he works with closely held businesses and non-profit charities, hospitals and family foundations to maintain tax efficiency and comply with federal and state regulations. He can be reached at the CPA firm’s Ft. Lauderdale, Fla., office at (954) 712-7000 or info@bpbcpa.com.
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