IRS Issues Guidance on Section 125 Plans
The Internal Revenue Service (IRS) has issued guidance that addresses concerns regarding Health Flexible Spending Accounts (FSA) and dependent care coverage.
Today the IRS released two sets of guidance that address some of the Section 125, FSA and HSA requests that were made last month by the National Association of Health Underwriters. Although the guidance is limited, there are actions being taken by Congress and the Administration to build on the guidance released today.
Notice 2020-29 provides for increased flexibility that NAHU requested with respect to mid-year elections made under a Section 125 cafeteria plan during calendar year 2020 related to employer-sponsored health coverage, FSAs and dependent care assistance programs.
The notice also provides increased flexibility with respect to grace periods to apply unused amounts in health FSAs to medical care expenses incurred through December 31, 2020, and unused amounts in dependent care assistance programs to dependent care expenses incurred through December 31, 2020. Further, the notice provides that previous relief provided regarding high-deductible health plans and expenses related to COVID-19 regarding a temporary exemption for telehealth services may be applied retroactively to January 1, 2020.
Notice 2020-29 addresses among other items:
- Extending claims periods for taxpayers to apply unused amounts remaining in a health FSA or dependent care assistance program for expenses incurred for those same qualified benefits through December 31, 2020.
- Expanding the ability of taxpayers to make mid-year elections for health coverage, health FSAs, and dependent care assistance programs, allowing them to respond to changes in needs as a result of the COVID-19 pandemic.
- Applying earlier relief for high deductible health plans to cover expenses related to COVID-19, and a temporary exemption for telehealth services retroactively to January 1, 2020.
Notice 2020-33 increases the $500 limit for unused amounts remaining in a FSA that may be carried over into the following year by making the carryover amount 20 percent of the maximum salary reduction amount under Section 125(i), which is indexed for inflation. Simply stated, for 2020, the carryover amount will increase to $550.
The notice refers to previous guidance on how a Section 125 cafeteria plan may be amended to allow prospective health FSA election changes for the 2020 calendar year. The previous notice permits employers to amend Section 125 cafeteria plans to provide participants flexibility to change health FSA contribution elections at such times as the employer permits through the end of 2020, provided that any changes are applied only prospectively.
For ICHRAs, the notice also provides clarification regarding reimbursement for premium expenses occurring prior to the beginning of the plan year. For example, if the employee paid the month's premium in the month/year before (i.e., employee paid the January individual coverage period in December of the year before), the employer can still immediately reimburse the employee.
Please contact Premier Insurance with any questions.