Section 125 Cafeteria Plan Increased Flexibility in Response to Novel Coronavirus
Updated: May 21, 2020
Regulations: What would we do without them? (I know you love them!) There are many surrounding your Employee Benefit Package. Not to worry! Let me help you understand.
Elections and changes of an employer benefit plan are regulated by Section 125 of the Internal Revenue Service. Some names it is known by: FSA, POP Plan, DCAP, Cafeteria Plan. This regulates what an employer and employee can do with the plan elections, as well as how funds are handled. It is one of the reasons that employees can take premiums out of their paycheck pre-tax; and why the only other time that you can make a change on your benefit is if you have had a “Life Event”. (outside of new hire or open enrollment)
In response to the Coronavirus Pandemic, IRS issued IRS Notice 2020-29 that gives increased flexibility for mid-year elections or changes under Section 125 plan during 2020 for Employer Plans, Flexible Spending Accounts (FSA) and Dependent Care Assistance Programs (DCPA). Employers can amend your Section 125 Plan to allow changes, but not required to. Generally, there is a cost to amend your plan, and notices to employees will need to be distributed.
What Can you allow?
Please note that Section 125 changes per this notice don’t necessarily mean that Medical Insurance Carriers will allow changes to plan elections. I’ve asked for direction from them and will let you know what I find out.
New Election for health coverage if initially waived coverage
Change current medical plan election and enroll in a different plan offered by the same employer
Drop medical plan election all together (with attestation that they will obtain other coverage)
FSA: Increase, Decrease, add or drop election on Health FSA & DCAP
So what does this mean for Employers? If you decide to allow the changes:
It doesn’t have to be unlimited, and you can determine the extent of changes. Don’t forget to consider discrimination rules. It must be equal for all, and not determined on a case by case basis. You may want to have a policy in place that guides determination.
All of these are for future elections – meaning it would apply to services for date of service after election is changed. If you had a service in January, you would not be able to cover that date of service after you made a change to your elections in May.
You will want to consider limitations for Section 125 testing to prevent adverse selection.
ERISA Notices will be required as this is a mid-plan change. A SMM will need to be distributed. See my other article “COBRA & ERISA Extensions During COVID-19” for more about the notices.
More about FSA and DCAP Flexibility
You may be aware that the IRS has already allowed a carryover provision or grace period to give members more time or a roll-over of money into the next plan year to help with the dreaded “use-it-or-loose-it” rule. You can have one or the other, not both. See IRS Notice 2020-33
If the employer decides to allow changes:
Grace Period allows employee to have a date of service after the plan year ends. Example: let’s say you have a plan start January 1, 2019 to end of December 31, 2019. A grace period would allow date of service into 2020 until March 15 to incur claims.
Under the new plan the employee would able to incur claims against 2019 plan year until the end of 2020.
Carryover Provision allows employees to take $500 into the next plan year. (Moved up to $550 with this notice) Example: Plan start June 1, 2019 to end May 31, 2020:
would allow you to take $550 into the new plan year starting June 1, 2020.
Members will have until December 31, 2020 to spend all the money left over from 2019 Plan year.
WHY? Let’s say you had a surgery scheduled for April or May 2020 – that was postponed due to COVID-19. If you had set money aside, and the plan year ended.
You now have until December 31 to spend it all.
Then January 1, 2021 through May 31, 2020 if you have any left from, up to $550 can be used from 2019 carry over provision.
I know your next question is: Why only a $50 increase? I ask that you contact your representatives and express your wishes! The more voices they hear – the more chance there will be. National Association of Health Underwriters (NAHU) is actively trying to get an increase to that amount.
“Life is really simple, but we insist on making it complicated”
Confused about what to do? Schedule a call with me today.
For an example of written attestation, FSA Carryover examples and more information click UBA Compliance Advisor
Check out Fringe Benefit Analysts Coronavirus Resource Center for additional documents, resources and webinars.