The COVID-19 winds of change: Impacts on FSAs

On Tuesday, May 12, 2020, the IRS published COVID-19 guidance for employer sponsored healthcare benefits. Drafted to address unanticipated changes in medical and childcare costs due to the COVID-19 emergency, the two Notices relax mid-year election changes for Health Flexible Spending Accounts (FSAs) and Dependent Care Assistance Programs (DCAPs) with plan years that begin in 2020. They also provide more flexibility in grace periods for both types of accounts and increase the maximum annual carryover amount for health FSAs.
 
The IRS outlines, in Notice 2020-29, that employers can elect to amend health FSA and DCAPs that begin in 2020 to allow for changes to annual elections or allow new elections. Please note that employers are not required, with one noted exception, to amend their plans and have also been given the ability to determine which changes are allowed.


Employers have choices to make with respect to various aspects of their FSA plans. Per the new IRS guidelines:

1. Employers may allow Health FSA and DCAP participants to do the following:

  • Allow employees who did not enroll in the Health FSA or DCAP at open enrollment to enroll mid-plan year.
  • Increase, decrease, make a new election, or revoke an existing Health FSA election (NEW)
  • Increase, decrease, make a new election, or revoke an existing election for a Dependent Care FSA (Not new, always allowed, but a good reminder during this emergency)

2. Employers may allow changes to employer sponsored healthcare benefit enrollment (medical, dental, vision, etc.) impacting the Premium Only part of the plan which previously required a qualifying change of status event (change of marital status, addition or loss of a dependent, etc) and now allows participants to:

  • Revoke an existing election and make a new election of different health coverage offered by the employer. Example: An employee enrolled in a PPO medical plan can switch to an HSA HDHP medical plan if the insurance carrier will allow it. Now the POP will allow it too.
  • Revoke an existing election and make a new election in a plan not offered by the employer.  Example: An employee enrolled in the employer medical plan decides to terminate coverage and enroll in a spouse’s plan. No need for a qualifying change of status event.

3. Health FSA plans with existing 2.5 month grace periods, have the option to amend their plans to extend that grace period all the way out to December 31, 2020. 

4. Health FSA plans with $500 Carryover provision, have the option to:

  • Amend their plans to extend the grace period all the way out to December 31, 2020.
  • Amend plans to increase the maximum carryover to $550, an increase of $50. 

This can be tricky to understand so here’s an example from Notice 2020-29 for you:
 
Example: Employer provides a health FSA under a §125 cafeteria plan that allows a $500 carryover for the 2019 plan year (July 1, 2019 to June 30, 2020). Pursuant to this notice and Notice 2020-33, Employer amends the plan to adopt a $550 (indexed) carryover beginning with the 2020 plan year, and also amends the plan to adopt the temporary extended period for incurring claims with respect to the 2019 plan year, allowing for claims incurred prior to January 1, 2021, to be paid with respect to amounts from the 2019 plan year.

5. Employers with FSA plans which currently do not have an Extended Grace Period provision or a $500 Carryover Provision may elect to:

  • Add an Extended Grace Period.
  • Add a $550 Carryover Provision.

Keep in mind that all of these 5 options above are voluntary. Employers can choose whether or not they want to make some, any or none of these amendments. There is one amendment, however, that is required:

Keep in mind that all of these 5 options above are voluntary. Employers can choose whether or not they want to make some, any or none of these amendments. There is one amendment, however, that is required:

All plans that end on or after March 1, 2020must allow any days remaining in the original run out (after March 1 plus the “outbreak Period” before the claims submission period can close.  Run-out is the period of time a participant has to submit claims incurred during the plan year (or lengthened grace period).  It is a time where the participant cannot incur more expenses to spend down an unused balance.  At Sound Benefit Administration, our plan documents have a 60-day run-out period. Participants now have until the end of the National Emergency or such other date announced by the Agencies in a future notice to submit claims to the plan. 

Example: A participant makes a qualified Health FSA purchase on March 1, 2020 but does not submit a claim right away.  Her employer’s FSA plan runs from April 1 to March 31 with a 60-day run out (May 30th).  Assuming the Outbreak Period ends on July 1, 2020, the participant has until August 29, 2020 to file her FSA claim for reimbursement (60 days after 7/1/20).


Depending on when an FSA plan year runs, it may not be urgent to address making an amendment to the plan.  A wait and see attitude could be beneficial to see if participants are using up their election amounts towards the end of the plan year before making an amendment change.  The only urgent amendment might be allowing employees to stop their Health FSA election RIGHT NOW instead of letting it wait until the end of the year. We’re here to discuss plan options and particular circumstances in order to make the right amendment changes (or no changes) that fit a company’s needs.


Ways to stay informed

As we navigate this new world, we expect that more changes, clarifications and guidance will be given. SBA has two ways for you to get up to date information:

SBA’s COVID-19 Resources page. We have established a COVID-19 resources pages on our website with links to articles we have written, FAQs related benefit programs and COVID-19, as well as any forms or documents, such as change of status or leave of absence forms that will be in higher demand during this time.

SBA’s Monthly Soup Scoop Newsletter. Please subscribe to Soup Scoop to have our most recent articles and information delivered to your inbox.


It is our sincere hope that you, your employees, your families and friends – and your business – is staying healthy in these challenging times. If we can be of assistance in any way, please contact us.

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