IRS Increases Flexibility of Cafeteria Plans and High Deductible Health Plans

May 22, 2020

Because of the changes we are all experiencing with COVID-19, many employees may not be incurring the health and dependent care expenses they anticipated when they made elections for salary reduction contributions to cafeteria plans for 2020.

To accommodate this unexpected situation, the IRS is relaxing a number of rules that could allow employees to access additional cash.  The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act also loosened the rules regarding High Deductible Health Plans (“HDHPs”).

Cafeteria Plans

Under a cafeteria plan, an employee reduces wages and elects to have the employer pay certain health care or dependent care expenses with the salary reduction amounts.  In general, those elections are made before the beginning of the year and cannot be changed, except in limited circumstances.

In addition, once an employee decides to receive benefits instead of salary, those benefits must be paid during the year except in two situations.  For health flexible spending accounts (“FSAs”), an employer can either allow employees to carry over $550 to be paid for medical expenses in the next plan year or allow amounts to be spent on medical expenses within a two month and 15 day grace period following the end of the year.  A dependent care program can allow amounts to be spent on dependent care expenses within a two month and 15 day grace period following the end of the year.

The IRS has loosened the election rules, effective January 1, 2020, by allowing an employer to amend a cafeteria plan so that changes to elections can be made by employees prospectively for enrolling in health plans, or to discontinue coverage with the employer-sponsored health plan as long as the employee attests that coverage is being provided or will be provided in health coverage not sponsored by the employer.

In addition, an employee can change an election to enroll in different health coverage provided by the same employer.  An employee can also prospectively revoke an election, make a new election or increase or decrease an election amount for contributions to a health flexible spending account or dependent care assistance plan. An employer can decide to what extent election changes will be allowed as long as the permitted changes would comply with applicable nondiscrimination rules.

The IRS is also allowing employers to amend cafeteria plans, effective January 1, 2020, to allow unused amounts in a health FSA or dependent care program as of the end of the grace period or the 2020 plan year to be used to pay appropriate expenses through December 31, 2020. Liberalizing this even more, an employer can amend a cafeteria plan to use both of these rules for the plan year beginning in 2020.  In that way, employees who cannot use all of their 2019 amounts carried over to 2020 can use the expenses for any costs incurred during the plan year beginning in 2020 and carry over $550 to the 2021 plan year. An individual who had unused amounts remaining at the end of a plan year or grace period ending in 2020 and who is allowed an extended period to incur expenses under a health FSA pursuant to a plan amended as described above will not be eligible to contribute to an HSA during the extended period (except in the case of an HSA-compatible health FSA, including a health FSA that is amended to be HSA-compatible).

These plan amendments can be made as late as December 31, 2021, provided the plan is operated in accordance with these rules and employees are notified of the changes. Any amendment applies only to mid-year elections made during 2020.  An amendment to apply an extended period for unused health FSA amounts or dependent care assistance program amounts for the payment or reimbursement of medical care expenses or dependent care expenses applies only to expenses incurred before January 1, 2021.

Employees who have amounts accumulating in a health FSA or dependent care assistance program can change their salary reduction amounts prospectively and use current accumulations in a health FSA or dependent care program through the end of this year.

High Deductible Health Plans

Many employers sponsor HDHPs, enabling employees to maintain Health Savings Accounts (“HSAs”).  A high-deductible health plan has specified deductibles that apply for certain expenses.  Effective January 1, 2020, an HDHP will not fail to meet the HDHP rules merely because medical care services and items purchased related to testing for and treatment of COVID-19 are not subject to the minimum deductible. This includes diagnostic testing for influenza A & B, norovirus and other coronaviruses, and respiratory syncytial virus and any items or services required to be covered with zero cost.  In addition, telehealth and other remote care services can also be provided without a deductible or with a deductible below the minimum annual deductible for services provided on or after January 1, 2020, with respect to plan years beginning on or before December 31, 2021.

To discuss amending cafeteria plans to enable employees to maximize the use of salary reduction amounts for medical expenses and dependent care expenses contact Deb Walker.

Related Resources