IRS Permits Employers to Offer Much-Improved Flexibility in Benefit Plans
/The pandemic is causing sweeping changes in the personal and work lives of Americans. In response, the IRS has issued guidance providing significant flexibility in several areas related to employee benefit plans.
Employees May Make Mid-Year Changes Without a Qualifying Event
Typically, benefit election changes are only permitted when an employee experiences a “qualifying event” such as marriage, divorce, loss of a spouse’s insurance, etc. However, given our current environment, there are many reasons employees may want to change their elections. A few examples include: those making contributions to a medical flexible spending account for planned surgeries which have been cancelled or postponed; employees who initially declined to enroll in their employers’ medical plans but now wish to enroll, and employees making contributions to dependent care flexible spending accounts when daycare centers are closed or summer camps are canceled.
The guidance provided in IRS Notice 2020-29 permits employees to:
make a new election for employer-sponsored health coverage even if the employee initially declined; this also includes electing a different coverage tier (employee-only, employee+child, family)
revoke an existing election for employer-sponsored health coverage and make a new election to enroll in different health coverage sponsored by the same employer . . . (including changing enrollment from self-only coverage to family coverage);
revoke an existing election for employer-sponsored health coverage, if the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer
revoke an election, make a new election, or change an existing election regarding a health FSA; and
revoke an election, make a new election, or change an existing election regarding a dependent care FSA
These changes apply on a “going forward” basis meaning that the changes take effect the date employees change their elections. They are not retroactive.
Employers May Extend Their Grace Periods
The IRS guidance also provides greater flexibility for health flexible spending accounts (FSA) and dependent care assistance programs (DCAP). If your plans provide for a grace period for the 2019 plan year (meaning the grace period expired in 2020), then the grace period can be extended until December 31, 2020. This means that your employees will have considerably longer to use their 2019 account funds which would otherwise be forfeited.
The provisions described above, are optional. Employers may offer all, none or some of them. Employers offering these choices must adopt a plan amendment to by December 31, 2021.