IRS: Notices 2020-29 and 2020-33 Overview
Last Updated May 15, 2020
The federal government continues to recognize and respond to the challenges faced by health plan participants during the COVID-19 National Emergency. In the latest developments, the Internal Revenue Service released Notices 2020-29 and 2020-33 addressing some of the concerns that have been raised by employers and participating employees.
Increased Flexibility for Mid-year Election Changes
Previously, despite the National Emergency, participating employees could not make mid-year election changes unless they had a qualifying life event. This was a challenge for employees whose anticipated health care costs changed as a result of the National Emergency or those simply trying to save costs. Additionally, if an employee had not previously elected to enroll in a dependent care account (DCA) but now had childcare costs due to school closures, the employee couldn’t enroll in the benefit midyear and use pre-tax deductions to pay for those costs.
Under Notice 2020-29, employees can now make these mid-year changes without having a specific qualifying life event. In effect, the COVID-19 outbreak becomes a qualifying life event in itself. This increased flexibility applies to Employer-Sponsored Group Health Plans, Health FSAs, and DCAs for mid-year elections during 2020.
Employees who waived coverage can enroll on a prospective basis. Those that enrolled can revoke an existing election, enroll in a different plan, or change coverage level. For Health FSAs and DCAs, prior election amounts can be increased or decreased. For Group Health Coverage, if the employee revokes an election, the employee must attest that they have or will enroll in comprehensive coverage not sponsored by the employer. All changes must be done on a prospective basis.
Health FSA and DCA Grace Period Flexibility
The closures were also placing many participating employees in the position of forfeiting large sums that they had already contributed. For example, some employees may have elected a Health FSA to help with the costs of a planned but not urgent surgery that couldn’t proceed due to closures. Many DCA participants may have contributed all year to cover summer camp expenses only to face the closure of all summer camps and the forfeiture of all they had contributed. With no option to refund contributions to employees and uncertainty as to whether childcare facilities would reopen so employees could utilize their previously contributed funds, employers had limited ways to help their employees with these benefits.
Under Notice 2020-29, employers can choose to extend any grace period within which participating employees can use the amounts they have contributed. Any Health FSA or DCA with a Grace Period or Plan Year ending in 2020, can be amended to allow employees to use their funds for expenses incurred through December 31, 2020. This applies to Health FSA plans that offer the Carryover (Rollover) even though plans normally cannot offer both a Grace Period and a Rollover.
However, be aware: Offering an extended period for Health FSA claims will make plan participants ineligible to contribute to an HSA throughout the extended period unless the Health FSA is HSA-compatible or amended to be HSA-compatible.
Health FSA Carryover Limit
Under Notice 2020-33, the Maximum Carryover amount for a plan year may be equal to 20% of the maximum salary reduction contribution under §125 (i) for that plan year. With the current maximum permissible Health FSA election of $2,750, the Health FSA Carryover (Rollover) Limit has been increased from $500 to $550 into the 2021 plan year. This increased amount provides extra relief for participants who may not be able to use the entire amount they elected even with an extended grace period.
Section 125 Cafeteria Plan Amendments
Unlike the extension of key deadlines under the Relief notice, these changes are not applied automatically to plans. Employers must choose to amend their plan to adopt these new provisions. Employers may adopt some or all of these new provisions and may place limits on them.
For example, an employer may limit the period during which employees may make a mid-year election change or may only allow those which increase or improve coverage (such as employee only coverage to family coverage). Employers may also limit mid-year Health FSA and DCA changes to an amount no less than the amount already reimbursed by the plan.
Employers must amend their §125 Cafeteria Plan on or before December 31, 2021 with the amendment retroactive to January 1, 2020 provided that a) the §125 cafeteria plan operates in accordance with Notice 2020-29 and b) all eligible employees are informed of the changes to the § 125 cafeteria plan.
High Deductible Health Plans
Covid-19 Testing and Treatment
Notice 2020-29 also clarifies that medical care services and items related to testing and treatment of COVID-19 may be covered prior to the deductible (as permitted by Notice 2020-15) retroactively to January 1, 2020. Additionally, this notice clarifies that certain panels of diagnostic testing and items or services required to be covered with zero cost sharing under the Families First Coronavirus Response Act, as amended by the CARES Act, are part of testing and treatment for this purpose.
Telehealth Services
Qualified High Deductible Health Plans may cover telehealth and other remote care prior to the minimum deductible. If they do so, this will not affect a participant’s eligibility to make tax-favored HSA contributions.
Individual Coverage HRAs
While not specifically related to the COVID-19 National Emergency, Notice 2020-33 provides that an ICHRA may treat expenses for health insurance premiums as incurred on either the first day of each month, the first day of the coverage period, or the date the premium is paid. As a result, premiums that are paid in one month for coverage in the following month or even one year for coverage in the next, may be paid at that time. This will help participants who will no longer have to wait for the first of the month, for example, to be reimbursed or who might pay a premium before the ICHRA plan year begins.
This change only applies to health insurance premiums, not to other medical care expenses. Those expenses continue to be eligible based on when incurred not when billed or paid.
Disclaimer: Please note that our guidance is designed only to give general information on the topics and issues covered. The information provided is not intended to be a comprehensive summary of all laws which may apply to your situation, treat exhaustively the subjects covered, provide legal advice, or render a legal opinion. Consult your legal advisor regarding the specific application of the information to your situation.
