I Will Be Here When You Are Ready, To Roll With The Changes . . . IRS Releases Section 125 Cafeteria Plan Tax Relief

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by Rebecca Hudson and Lyn Domenick

In response to the global novel coronavirus pandemic, the Internal Revenue Service released guidance to allow temporary changes to section 125 cafeteria plans.  These changes provide increased flexibility to employees to make mid-year election changes and take advantage of grace period extensions.  It also increases the amount of carry-over allowed for health flexible spending arrangements (FSAs).  Plan sponsors may elect to implement some or all of these optional changes which would apply to all employees, not only those who are directly impacted by the pandemic.

IRS Notice 2020-29 provides greater flexibility for taxpayers by:

  • extending the claims period for participants to apply 2019 unused amounts in a health FSA or dependent care assistance program (DCAP) account to pay or reimburse qualified expenses incurred through December 31, 2020.
  • permitting employees to make mid-year 2020 election changes on a prospective basis.  Employees can elect health coverage, health FSA coverage or DCAP coverage if they did not previously have it, change coverage options, or in some cases, they may drop coverage.
  • applying earlier relief for high deductible health plans to cover telehealth services retroactively to January 1, 2020.

In addition to the above changes, IRS Notice 2020-33 provides that the health FSA carry-over amount can now be set at 20% of the maximum annual health FSA salary reduction contribution amount.  For 2020 this is 20% of $2,750 or $550.

Plan sponsors who wish to take advantage of this new guidance should communicate the changes to employees as soon as the decision to adopt changes has been made.  Changes can be effective retroactive to January 1, 2020 while plan amendments will be required no later than December 31, 2021.