IRS Issues Guidance to Employers on Flexibility in Section 125 Administration Due to the COVID-19 Pandemic

May 12, 2020 – Charlotte, NC – Today the Internal Revenue Service (IRS) issued important guidance for employers on flexibility in administering Section 125 plans, including health care (HCFSA) and dependent care (DCFSA) flexible spending accounts, in response to the COVID-19 pandemic. This guidance is provided in Notice 2020-29. Additional guidance, including an inflation adjustment to the health care FSA carryover provision, is provided in Notice 2020-33. The guidance is a welcomed relief to employers that addresses several items of importance to flexible spending account plans, including the treatment of the dependent care FSA, mid-year election changes, as well as grace period and carryover options employers have in response to COVID-19.

Guidance released indicates:

• The carryover allotment available for plans that adopt the carryover feature for health care FSA has been adjusted for inflation from $500 to $550 for 2020.
• For plans that adopt the grace period extension, the grace period for unused health care FSA or dependent care FSA funds may be extended through December 31, 2020.
• Mid-year election changes related to COVID-19 may be permitted by the employer for both health care FSA and dependent care FSA. Employers may limit decreases to amounts no less than year-to-date reimbursements.
• High deductible health plans may provide coverage for COVID-19 related expenses, including telehealth services, before the deductible has been met without impacting HSA eligibility. This provision is retroactive to January 1, 2020.

Employers that wish to implement the carryover and/or extended grace period must amend their plans to allow these provisions. Amendments may be retroactive to January 1, 2020.

Employers with health savings accounts (HSA) that adopt the grace period extension should be aware that HSA eligibility will be impacted. Individuals with remaining health care FSA balances will not be allowed to contribute to an HSA during the extended grace period unless the health care FSA is an HSA-compatible health care FSA that is limited to dental and vision expenses only.

The IRS has provided model status change provisions as well as additional examples for employers in the following publications: