Can Employer Allow Mid Year Fsa Plan Contribution Changes

updated Jan. 4, 2021

The commodity beneath was concluding updated on June 10, 2020

On May 12, the IRS released two notices allowing employees during 2020 to brand changes to their enrollments in employer-sponsored wellness plans and to adapt pretax contributions to wellness flexible spending accounts (wellness FSAs) and dependent care flexible spending accounts (dependent care FSAs).

• Notice 2020-29 provides increased flexibility for participants to make midyear health programme, health FSA and dependent care FSA election changes.
  

• Find 2020-33 increases the carryover limit permitted for health FSAs.
  

These changes, which utilise simply to plan yr 2020, had been advocated by the Social club for Human Resource Management (SHRM). The new guidance is permissive; employers are not required to make these program changes.

Wellness Plan Enrollments and Elections

In IRS Detect 2020-29, the agency said information technology would allow increased flexibility regarding midyear ballot changes for group health plans and FSAs. Employers, at their discretion, may permit employees to make either or both of these changes:

• Enroll in employer-sponsored wellness plans during the plan year by making a new election. Employees may do so even if they had previously declined enrollment.
  

• Switch health plans or tiers within plans. Employees volition exist able to driblet current coverage to enroll in different coverage offered past the same employer or change from single coverage to family coverage, for instance.

"The IRS detect says that employers are not required to provide unlimited changes and the employer tin set a timeframe to make changes," said Chatrane Birbal, vice president, public policy, at SHRM.

Although allowing employees to make these newly permitted plan changes during 2020 is optional for employers, many "will desire to enable employees to enroll or revoke an enrollment election in various group health plan options," noted Gary Kushner, president and CEO of Hour and benefits consulting business firm Kushner & Company in Portage, Mich.

Difficult Times

While nether existing Section 125 cafeteria program rules a change in the employment condition of a spouse would be a life event that allows a midyear election modify, the new guidance does not crave that employees provide documentation of this, or that a requested election change exist consequent with any change-in-status event.

Julie Stone, N America co-leader for the health management do at 60 minutes consultancy Willis Towers Watson, noted that "from an enrollment/plan election perspective, I expect there are many people where both partners/spouses were employed and opted to be covered under ane programme potentially with children. If that parent loses employment, the cost of family COBRA is likely to be much more plush than changing to the working spouse/parent'south employer sponsored programme."

She added, "Given the unemployment and furlough rates, I think this is ane of the most important aspects of the new guidance."

David Speier, managing director for benefits accounts at Willis Towers Watson, said that allowing midyear programme elections could mean that employees volition "switch to a plan that increases the employer'south financial burden during a hard time," for instance if employees opt for a low-deductible programme with higher premiums paid by the employer, or shift from unmarried coverage to a more expensive family program. However, other midyear changes could reduce an employer'due south price sharing, "as when employees elected a dental programme but now opt out because they tin't use information technology this year," Speier added.

FSA Enrollments and Elections

For both health FSAs and dependent intendance FSAs (used to fund caregiving expenses with pretax dollars), employers can let employees enroll, drop coverage, and increase (within the annual limit) or decrease payroll-deducted contributions during 2020.

"This is welcome relief, and many employers volition consider providing it under their plans," said William Sweetnam, legislative and technical managing director at the Employers Council on Flexible Compensation, which represents sponsors of account-based benefit plans.

Stone explained, "At a fourth dimension where some people may be greenbacks-strapped, deferring elective procedures, new eyeglasses, etc., may well make sense, and so being able to suspend contributions to a health FSA or limited purpose dental/vision FSA is important."

Kushner blogged, "Many employers would embrace enabling dependent intendance FSA participants to increase (or more than likely decrease or revoke) their elections if schools and day care centers are closed, or if the employee is working from home."

Yet, for any FSA, "employers may be more reluctant to enable employees to subtract or revoke their election if they've already claimed their previous total ballot corporeality and payments take been disbursed," he added.

In 2020, employees can contribute $2,750 to a health FSA, including to a limited-purpose FSA restricted to dental and vision care services, which tin can be used in tandem with a health savings business relationship (HSA).

The dependent intendance FSA maximum, which is set by statute and non adjusted annually for inflation, is $5,000 a year for individuals or married couples filing jointly, or $ii,500 for a married person filing separately, subject to earned income limits.

[SHRM members-only forms: COVID-19 Midyear Election Change Testament]

FSA Use-It-or-Lose-Information technology Rules

Existing IRS rules provide an employer two options for unused health intendance FSA funds: A grace period into the new year during which employees can proceed to spend FSA funds from the previous year, and the ability to carryover over a limited amount of funds from the previous year. Employers tin choose to incorporate either the grace menstruation or the carryover feature, or neither, but not both.

The new guidance changes the rules for both these provisions for plan year 2020.

Grace Menstruum Extension

IRS rules allow employers to add together a two-and-one-half-month grace menses immediately following the end of each FSA program year, during which health FSA holders could spend whatsoever funds remaining in the business relationship. For calendar yr health FSAs, the grace period ends March 15. The new guidance will extend the grace period to the end of 2020.

For programme years catastrophe before Dec. 31, 2020, employers can improve a health or dependent care FSA programme to let participants to "spend down" through year-stop 2020 any remaining amounts from 2019 that would otherwise be forfeited. Employers can allow claims incurred at whatsoever time in 2020 to exist applied to whatever remaining 2019 FSA balances.

Plan amendments that extend the claims period for health and dependent care FSAs may exist effective retroactively to Jan. one, 2020. All eligible employees should be informed of the changes.

Increased Carryover Cap

IRS Discover 2020-33, as well released May 12, increases the amount of funds that health FSA participants can carry over without penalisation at the end of the twelvemonth for plans that utilise the carryover pick. The carryover amount will now exist indexed for inflation by making it xx percent of the allowable payroll-deductible contribution limit, which is $2,750 for program year 2020.

As a result, the maximum unused amount from a plan year starting in 2020 allowed to exist carried over to the immediately post-obit plan yr beginning in 2021 is $550, up from the previous limit of $500.

[SHRM members-only 60 minutes Q&As: What options does an employer have with unused FSA funds? ]

While Sweetnam chosen the aggrandizement adjustment helpful, he noted that many have advocated assuasive much larger carryover amounts or eliminating the use-it-or-lose-it dominion completely. "I think that the limited amount of the increase means that the IRS and Treasury Department were concerned that they did not take the authority under the Internal Acquirement Code to provide for a larger carryover corporeality," he suggested.

Discover 2020-33 also antiseptic that the previously provided temporary relief for loftier-deductible health plans (permitting them to cover COVID-nineteen related services at no cost) may be applied retroactively to Jan. one, 2020.

Unlike Plans Had Different Rules

Some midyear elective-contribution changes have long been permitted. For case, changes to payroll deductions to fund 401(k) or like divers contribution retirement plans, HSAs, and commuter benefit plans can exist made at any time for any reason, although employers may limit changes for administrative purposes, such as to in one case per month.

For employer-sponsored group health, dental and vision plans, still, changes are restricted. Under revenue enhancement code Section 125, elective contributions typically can be inverse only within 30 days of a qualifying event equally determined past the IRS, such as union, divorce, chore change, birth or adoption of a kid, or when a dependent child reaches age 26. The new guidance carves out an exception for changes fabricated during 2020 due to the COVID-19 pandemic.

HSA-Eligibility Issues

Sweetnam noted an issue with the new guidance that could complicate matters for employees who had a 2019 health FSA and were newly enrolled in an HSA in 2020: An employer that carries over unused funds from a prior year to a electric current year nether a general-purpose health FSA volition not be eligible for HSA contributions for the entire current program year.

"Carryover 2019 FSA amounts can be used to pay for health care expenses below the deductible in 2020, thus making participants [with both carryover health FSAs and new HSAs] ineligible to make HSA contributions in 2020," Sweetnam said. "Consequently, employers may desire to consider the impact on HSAs as they decide whether to extend the claims flow for health FSAs."

To avoid this effect, employers tin can let 2019 carryover health FSA funds to exist transferred an HSA-compatible, express-purpose FSA, which can exist used only for vision care and dental expenses.

SHRM Advancement

"Every bit employers and their employees navigate the current crisis, workplace health care has emerged as a critical outcome requiring flexibility," Emily M. Dickens, SHRM corporate secretary, chief of staff and head of government affairs, wrote in an Apr 16 letter of the alphabet to IRS Commissioner Charles Rettig.

SHRM advocated flexibility on rollover provisions, time frames for claims, and midyear election changes to FSAs due to employees' evolving wellness intendance and child care needs as a result of COVID-nineteen.

SHRM also requested a one-fourth dimension, pandemic-related window for employees who may have declined coverage at the first of the calendar year to enroll in an employer's health programme, every bit the IRS is at present assuasive for 2020. "Many employers are struggling with employee requests for election changes and whether such a change would exist permitted under IRS guidance," Dickens wrote.

In addition, SHRM asked the IRS to increase the annual $500 carryover limit for health FSAs for plans that utilize the carryover choice.

"Many employees … carefully contemplated a health care FSA election based on [elective] medical procedures that volition no longer occur," Dickens pointed out, and these employees should non be penalized because their anticipated annual medical expense estimates demand to exist adjusted.

Update:

HR consultancy Mercer'due south COVID-nineteen survey, with responses through June 9 from well-nigh 300 big U.S. employers, asked if they would "reopen" their health plans and FSAs for the 2020 program year to employees and their dependents, whether they currently participate or not, to make any type of midyear changes allowed past the IRS guidance.

Just under one-half (47 percent) of the employers surveyed indicated they will let some type of mid-year change, with the most popular being irresolute contributions to a dependent intendance FSA (43 percent) and irresolute contributions to health intendance FSA (29 per centum).

Fewer employers are planning to allow changes to medical program elections, such as enrolling in a program after having waived coverage or adding a dependent. Nevertheless, approximately 1 in 10 say they volition let these types of changes.

Source: Mercer COVID-19 survey, U.S. results as of half-dozen/9/2020 (279 respondents, more than than one response allowed).

"Allowing participants to change their contributions to dependent care or wellness FSAs can be a relatively uncomplicated way for employers to support employees coping with COVID-nineteen related issues," said Jay Savan, a partner in Mercer's health business organization. "Possibly a child'southward summer camp is closed, or someone cancelled some planned dental work, or a spouse is out of work and the employee merely needs more coin in their paycheck."

Savan said while there is very lilliputian downside in allowing dependent intendance FSA changes, employers should exist mindful that there are some potential risks associated with allowing changes to health FSAs. These risks include immediate employee access to total business relationship limits during a fourth dimension when employers are hyper-focused on conserving cash, likewise every bit the potential for employees to accelerate their use of health FSA funds and leave the programme in a deficit if they discontinue employment.

"Permitting enrollment changes midyear in core medical plans, however, brings with it much greater take chances to the sponsor, such every bit incurring high cost claims and more often than not enabling adverse selection," Savan noted. "It can besides take collateral impact on finish-loss reinsurance and other related contracts."

He brash employers to counterbalance these risks earlier liberalizing the terms of midyear enrollment in medical plans in 2020.

Related SHRM Articles:

Appropriations Act Permits Midyear FSA Elections, Unlimited Behave-over Amounts Through 2021, SHRM Online, January 2021

SHRM Asks IRS for Relief with Wellness Programme Compliance During Pandemic, SHRM Online, April 2020

Special COVID-19 Health Insurance Enrollment Windows and Waivers, SHRM Online, March 2020

2020 FSA Contribution Cap Rises to $2,750, SHRM Online, November 2019

Source: https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/irs-allows-mid-year-enrollment-and-election-changes-for-health-plans-and-fsas-coronavirus.aspx

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