Employees now have the opportunity to make changes to qualified benefit elections or newly enroll in an employer-sponsored section 125 plan throughout the remainder of 2020. The IRS introduced this expanded access and flexibility in Notice 2020-29, the latest phase of the agency’s continued accommodation efforts throughout the coronavirus pandemic.
What is changing?
Under a section 125 plan, also referred to as a cafeteria plan, employees use pre-tax dollars to pay qualified medical, dental or dependent care expenses. Elections for these benefits are typically made in an open enrollment period before a new plan year kicks off and are locked in for the entire plan year except for specific instances allowed under IRS regulations (changes in marital status, number of dependents, employment status, etc.).
IRS Notice 2020-29 provides employers the ability to amend their cafeteria plans to allow additional election changes to be made during the 2020 plan year.
What benefits or elections can employees change?
This notice specifically applies to employer-sponsored health coverage, health Flexible Spending Arrangements (FSA) and dependent care assistance programs.
For employer-sponsored health coverage, this means employees could make a new election, change their current election or revoke their existing election. Employees choosing to revoke an election are required by the IRS to provide a written attestation of alternate insurance coverage.
These same election change options are available for a health FSA and a dependent care FSA, as well as changes to employee contribution amounts. This flexibility is critical as employee needs may be vastly different now than at the time the election was made. For example, with a large percentage of the workforce at home and schools and child care providers closed, the need for employee contributions to a dependent care FSA may not be as great as it was at the start of 2020.
Additionally, the IRS will now permit employees to use any remaining amounts in a health FSA or dependent care FSA through December 31, 2020, regardless of when the plan year or grace period ended in 2020.
What employers should know
Notice 2020-29 simply gives employers the option to amend their section 125 plans to permit these midyear changes. It is still up to employers to make these changes and educate their workforce about this opportunity. Employers do have the freedom to limit these election change options as they see fit, as long as nondiscrimination rules in place are not violated.
Employers should consider these benefit election changes carefully before amending plans and offering to employees. Likewise, employees should also consider their personal and financial circumstances before making changes if and when their employers make this option available.
RKL’s team of business advisors are available to answer any questions employers may have about implementing this midyear change. Contact your RKL professional or reach out using the form below. Find more guidance and insights in our Coronavirus Resource Center.