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Earlier this week, the IRS released new guidance allowing certain mid-year election change events under an employer’s cafeteria plan in calendar year 2020 for group health plan coverage, health flexible spending accounts, and dependent care assistance programs.

Allowable Changes

Specifically, an employer may choose to allow employees to make the following mid-year election changes during the calendar year 2020:

1. Make a new election for employer-sponsored health coverage on a prospective basis if the employee initially declined coverage
2. Make changes to employer-sponsored health coverage (for example, a change from individual to family coverage, or change from one type of plan to another)
3. Revoke employer-sponsored health coverage on a prospective basis, if the employee attests in writing he/she has comprehensive coverage or will immediately enroll in other comprehensive coverage
4. Revoke an election, make a new election, or decrease or increase an existing election regarding a health flexible spending account or a dependent care assistance program on a prospective basis

In addition, the IRS is permitting employers to allow employees with unused funds in their health flexible spending account or dependent care assistance program at the end of a grace period or plan year that ends in 2020 to utilize those funds toward expenses incurred through December 31, 2020.

Example

An employer offers employees a health flexible spending account with a plan year that ends on June 30, 2020. Under these new rules, the employer could allow employees to use funds remaining in their account as of June 30 for expenses incurred through December 31, 2020.

Optional

Importantly, employers are not required to allow these mid-year election changes and if they do decide to allow some or all of these changes, they may place parameters on them-such as a onetime opportunity to take advantage of the event.

If an employer decides to take advantage of these mid-year election changes, it must adopt a plan amendment amending its Section 125 plan to allow for the change. The plan amendment must be adopted by December 31, 2021, and can be retroactive.

Evaluate Cost/Benefits

An employer should review its individual situation to determine whether allowing one or more of these mid-year changes would be advantageous to its employees. In addition, the employer should assess the risk associated with implementing these changes. 

For example, an employer may not want to allow employees to increase their health FSA elections since the entire amount of the election has to be made available to the employee during the plan year and cannot be recouped from an employee if he/she leaves mid-year. 

Additionally, an employer who has already assessed compliance with the non-discrimination requirements for the plan year would have to reassess compliance after the election changes are made. An employer who chooses to implement one or all of the above changes will need to amend its cafeteria plan to allow for the change and will need to notify employees of these changes.

With the complexities of this issue and this decision, companies are encouraged to consult counsel for assistance in determining whether and which changes to make or with a plan amendment.