The Internal Revenue Service (IRS) recently released two pieces of guidance relating to Internal Revenue Code Section 125 plans (cafeteria plans), health reimbursement arrangements (HRAs), and health savings account (HSA) eligibility. The guidance provides welcome options for plan sponsors to respond to the current pandemic and is available to participants (including employees who previously declined coverage) regardless of whether they are affected by the pandemic (in contrast to other CARES Act relief). Plan sponsors must amend their plans by December 31, 2021 to reflect any relief from the guidance they choose to adopt.
Under the guidance, plan sponsors may allow participants (including employees who previously declined coverage) to make prospective midyear changes during calendar year 2020 to their health and welfare plan elections (or make an initial election), regardless of whether they experience a traditional change in status event under the existing cafeteria plan regulations. Accordingly, for health plans for which participants pay premiums on a pretax basis and flexible spending accounts (FSAs), participants may change their elections prospectively as follows:
Comment: This guidance essentially allows a new prospective open enrollment period for health plans and FSAs. It remains to be seen whether plan sponsors will take full advantage of all—or merely some—of these opportunities. Many plan sponsors will likely at least choose to allow participants to prospectively modify or end their FSA elections, particularly since elective surgeries and many daycare centers and summer camps will not be available for the foreseeable future. Plan sponsors should confirm that their insurers will permit these changes to any insured options, and that stop-loss insurers (for self-insured options) will recognize midyear changes.
Plan sponsors may place nondiscriminatory restrictions on the right to make changes to prevent adverse selection of coverage by employees. For example, a plan sponsor may limit the number of times an employee may make a change to his or her elections. Or, a plan sponsor may limit the types of changes an employee may make, such as allowing only enhancements to health coverage (like switching from employee-only coverage to family coverage, or switching from a high-deductible plan to a preferred provider option with a lower deductible). In addition, a plan sponsor may prohibit reducing a health FSA election to less than the medical claims already reimbursed.
Comment: The relief does not address vacation-buy or similar programs, so individuals who elected additional vacation will still have to use the vacation days, lose the vacation days (where permitted), or perhaps have unused elected days cashed out at year end. It also does not apply to other benefits offered through cafeteria plans such as life insurance or disability benefits. Additional relief would be welcome to address these issues.
Plan sponsors may also allow participants to avoid the “use it or lose it” rule for FSA balances beyond the two-and-a-half-month grace period for dollars remaining in the FSA at the conclusion of the grace period following the 2019 plan year. Accordingly, participants could apply unused FSA amounts for health and/or dependent care expenses incurred after the end of (1) a grace period ending in 2020 (generally March 15, 2020 for calendar year plans) or (2) the plan year ending in 2020. The additional time to incur such expenses runs through December 31, 2020. Note that health FSA balances may still only be used for medical care expenses, and dependent care FSA balances may only be used for dependent care expenses.
This additional time is available for all health FSAs and for those health FSAs that are on a fiscal plan year; where the plan year ends sometime in 2020, this relief allows participants to spend down any unused dollars in their health FSAs for claims incurred through December 31, 2020.
In addition to the added time to incur claims, any fiscal year plan with a carryover feature can allow participants to carry over dollars into the 2020 plan year. For example, assume a participant has $1,000 remaining in a health FSA that has a $500 carryover feature and a plan year ending June 30, 2020. If permitted, the participant could continue to incur claims until the end of 2020 against the $1,000 remaining balance and then carry over an additional $500 into the 2020 plan year.
Comment: This relief does not apply to calendar year plans without a grace period. Plan sponsors that would like to add this relief to their plans should do so carefully, as any extension adopted for general FSAs (rather than limited-purpose/HSA-compatible FSAs) is other coverage that will disqualify a participant from contributing to an HSA for the additional period if they have a health FSA account balance at the end of the plan year.
The guidance increases the current $500 health FSA carryover limit to $550 and provides for future indexed increases. This is the first increase since the optional carryover feature was first permitted in 2013. As a reminder, the carryover allows amounts up to the (now $550) limit to be exempt from the use-it-or-lose-it rule, and applied to expenses incurred in the following year, in lieu of a grace period.
Comment: Plan sponsors that previously adopted the optional carryover feature should consider adopting the higher limit to maximize the benefit to participants. Plan sponsors that would like to add the carryover feature to their plans should do so carefully, as (1) they may not have both a carryover and a grace period, and (2) carryover amounts for general FSAs (rather than limited-purpose/HSA-compatible FSAs) are other coverage that will disqualify a participant from contributing to an HSA for plan years in which residual amounts are carried over.
The guidance provides that a health plan that reimburses insurance premiums can treat health insurance premiums as incurred on a monthly basis, on the first day of the coverage period, or the date the premium is paid. This will allow HRAs, including qualified small employer HRAs (QSEHRAs), to reimburse the premiums in more instances, consistent with the current administration's priorities.
Comment: While this expansion is most relevant to small employers that reimburse for other insurance coverage rather than employers that offer their own group health plans, it may also be helpful to employers offering retiree HRAs and other individual coverage HRAs (ICHRAs) under Executive Order 13877.
The guidance further clarifies that expanded eligibility for COVID-19 testing and treatment and telehealth benefits will not cause an individual to be ineligible to contribute to an HSA. Prior IRS guidance allowed high-deductible health plans to provide first-dollar coverage of testing and treatment of COVID-19 without affecting a participant's HSA eligibility. This was expanded by the Families First Coronavirus Response Act, and is clarified in this guidance to include the panel of testing for influenza A and B, norovirus, other coronaviruses, and respiratory syncytial virus.
In addition, the guidance clarifies that the expanded first-dollar telehealth coverage permitted by the CARES Act may be offered as early as January 1, 2020 without affecting HSA eligibility.
Comment: This guidance solves several outstanding problems created by vendors that began free telehealth benefits or COVID-19 testing before the legislative effective date, but others remain, such as the ability to extend testing or telehealth coverage to an individual not otherwise eligible for health plan coverage without triggering ACA mandates and preventive care requirements.
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