IRS Provides Flexibility For FSA’s and DCA’s
May 13, 2020 | COVID-19 Industry News OCA News Quick Alerts
To assist with the nation’s response to the Coronavirus outbreak, the IRS has issued a number of extensions and relief offerings to employee benefit programs such as Health FSAs, Dependent Care Accounts, etc. On May 13th the IRS issued Notice 2020-29 which provides for increased flexibility with respect to mid-year election changes during calendar year 2020 related to Health Flexible Spending Arrangements (“FSAs”) and Dependent Care Assistance Programs (“DCAs”). This notice also provides increased flexibility with respect to grace periods to apply unused amounts in health FSAs and Dependent Care Assistance Programs incurred through December 31, 2020. In addition, the IRS also released Notice 2020-33 which increased the $500 carryover amount for health FSAs.
In the below subsections, we’ve highlighted some of the relief offerings and the impact it may have on your benefit account(s). Should you have any questions, please feel free to contact OCA at 855-622-0777.
Relief for Mid-Year FSA/DCA Election Changes
Effective for calendar year 2020 only, an employer, at their discretion, may now permit employees who are eligible to make salary reduction contributions under a Health FSA and/or Dependent Care Assistance Program to do one of the following for any reason on a prospective basis:
- Revoke an election
- Make a new election
- Decrease or increase an existing election
Employers may limit decrease/revoke to the reimbursement already provided (i.e. if elected 2500 and have received 2000, you may limit decrease to 2000 so that salary reductions will cover the reimbursement). It is also important to note that election changes may not be retroactive (i.e. no refunds). Therefore, DCA elections already contributed for future daycare expenses (i.e. summer camps) may not be returned to the plan participant.
Qualified Election Changes for FSA and DCA
Regardless of the IRS extensions, the below tables illustrate different event types that would allow an FSA and/or DCA participant to make a change to the benefit.
| DCA Plan | DCA Election Status |
|---|---|
| Termination of employment, furlough or reduction in hours of employment that causes the employee to lose eligibility for the Dependent Care FSA | Election automatically terminates by virtue of losing coverage |
| Reduction in hours of employment that causes the employee to lose eligibility for the Dependent Care FSA | Election automatically terminates by virtue of losing coverage |
| Employee begins paid leave of absence that does not cause the employee to lose eligibility | Employee may reduce or revoke his/her election to account inability to seek tax free reimbursement due to the employee no longer needing day care to work or look for work |
| Employee begins an unpaid leave of absence that does not cause the employee to lose eligibility | Employee may reduce or revoke his/her election to account for inability to seek tax free reimbursement due to the employee no longer needing day care to work or look for work |
| Employee’s day care closes | Employee may revoke election |
| Employee switches day care providers | Employee may change election to account for new day care |
| Employee works from home and takes child out of day care | Employee may revoke election to account for no longer needing day care. |
| Employee works from home but pays babysitter to watch child while working | Although unclear, we believe that the IRS would consider this to be childcare that is necessary for the employee to work—at least during these times. |
| Employee’s spouse becomes subject to a work from home policy, is furloughed or is laid off. | Employee may revoke his or her election. |
| Health FSA Plan | Election Change Status |
|---|---|
| Termination of employment, furlough or reduction in hours of employment that causes the employee to lose eligibility for the Health FSA | Election automatically terminates by virtue of losing eligibility coverage under the plan |
| Reduction in hours of employment that causes the employee to lose eligibility for the Health FSA. | Election automatically terminates by virtue of losing coverage |
| Employee begins a paid leave of absence that does not cause the employee to lose eligibility for the Health FSA | No election change permitted since eligibility under the Health FSA and the cafeteria plan are not affected by the event. |
| Employee begins an unpaid leave of absence that does not cause the employee to lose eligibility for the Health FSA (i.e. employee may continue coverage under the Health FSA so long as the employee pays the contributions, usually through after-tax | Unless your plan requires employees on an unpaid leave to pay with catch up contributions upon return, or you have agreed to allow pre-payment of pre-tax salary reductions, we believe that an election change to revoke coverage is permissible. |
| Employee is urged to or is forced to work from home | No election change permitted |
| Employee or dependent is unable to have a planned medical procedure due to facility closings or forced rescheduling of appointments | No election change permitted |
| Employee’s spouse loses coverage under his/her employer’s health plan as a result of a termination, furlough or layoff | Employee may enroll or increase his or her Health FSA salary reduction election |
| Employer makes changes to comply with federal benefit mandates (e.g. the changes in the Families First legislation) | No election changes permitted. |
Extended Grace Period
This notice also provides flexibility for employers, at their discretion, to provide an extended period of time to incur unused amounts remaining in an FSA or DCA account. The extension of time for incurring claims is available for plans that have a grace period and for plans that provide for a carryover (Health FSAs can either adopt a grace period or provide for a carryover amount but cannot have both).
Key Takeaways:
- Grace period ending in 2020 may be extended through December 31, 2020.
- A plan without a grace period that ends in 2020 (i.e. a fiscal year plan) may extend the plan year through December 31, 2020.
- An employer that adopts this rule will make an employee ineligible for an HSA through at least December 31, 2020.
Note: Certain plans would not need the relief provided in this notice. For example, a plan with a plan year ending on or after October 31, 2020, continues to be able to provide a grace period of up to two months and 15 days, which would allow the reimbursement of claims incurred after December 31, 2020.
Health FSA Carryover (Notice 2020-33)
Under prior guidance, a health FSA could provide that unused amounts at the end of the year could be carried over to the following plan year. The limit on the carryover amount was $500. Last year, President Trump signed an executive order that directed the Treasury Department and IRS to issue guidance that would increase the amount that could be carried over in a health. This notice provides that the $500 carryover amount is to be indexed for inflation, meaning that the carryover amount in 2020 will be $550. A plan amendment to effectuate this change must be adopted by December 31, 2021 and can be retroactive to the 2020 plan year.