Permissible mid-year election changes

Under Notice 2020-29, during 2020 employers may allow employees to:

• Make a new health coverage election, if they previously declined employer-sponsored health coverage
• Revoke their current election and to enroll in different employer-sponsored coverage, including changing from self-only to family coverage
• Revoke their current election without electing different employer-sponsored coverage provided they make a written attestation that they have other health coverage

Moreover, employers may allow employees who have health FSAs or DCAPs to revoke an election, make a new election, decrease an existing election or increase an existing election. This flexibility also applies to limited-purpose health FSAs that are designed to be compatible with health savings accounts (HSAs) and can only be used to pay for certain expenses like vision and dental services.

Employers may permit some, all or none of these options, and are not required to provide unlimited election changes.

Extension of the period to spend unused amounts in health FSAs or DCAPs

If employees have unused amounts in health FSAs or DCAPs as of the end of a plan year (or grace period) ending in 2020, the employer may permit those funds to be used to pay or reimburse medical care or dependent care (as applicable) through December 31, 2020. A grace period is a period of time (not to exceed two months and 15 days) after the end of a plan year during which employees can continue to incur medical expenses and have them reimbursed. The extension of time also applies to plans that provide for a carryover.

In general, employees that are allowed to spend unused funds through December 31, 2020 will not be eligible to contribute to their HSA during this period. However, there’s an exception for health FSAs that are limited-purpose FSAs.

Limit on health FSA carryovers

Separate guidance, Notice 2020-33, provides a new formula for determining the maximum unused health FSA amount that employers may permit employees to carry over from a plan year for 2020 and beyond (currently $500). It will be equal to 20 percent of the maximum salary reduction to a health FSA allowable for that year.

Consequently, an employee can be permitted to carry over a maximum of $550 from a plan year starting in 2020 to a plan year starting in 2021. That is 20 percent of $2,750, this year’s maximum salary deferral.

Effective date relating to testing/treatment for COVID-19, telehealth services and HDHPs

An earlier Treasury/IRS notice (Notice 2020-15) permits high-deductible health plans (HDHPs) to pay for testing and treatment for COVID-19 before individuals meet the deductible under their HSA-qualified HDHP. Notice 2020-29 clarifies that this notice may be applied retroactively to medical expenses incurred on or after January 1, 2020.

The CARES Act permits coverage for telehealth and other remote care services before the HDHP deductible is met. Although this provision took effect upon enactment (March 27, 2020), and applies to plan years beginning on or before December 31, 2021, Notice 2020-29 states that this provision applies to services provided on or after January 1, 2020.

Implications for employers

Employers should decide what relief, if any, they would like to provide to their employees. Employers with non-calendar year plans may wish to take advantage of the guidance soon, in order to help employees who have not been able to receive non-emergency services, vision or dental benefits due to the public health emergency.

Plan amendments would be required to take advantage of this new flexibility or increase the carryover amount. December 31, 2021 is the deadline for adopting plan amendments.

Although formal plan amendments do not need to be made right away, employers will need to inform employees of any plan changes and operate the plan consistently with those changes.

Segal can assist employers in preparing amendments and communicating the changes to employees.

On all issues involving the interpretation or application of laws and regulations, plan sponsors should discuss the issues raised here with their legal, tax and other advisors before determining how the issues apply to their specific situations. Plan sponsors should consult with legal counsel prior to adopting any change to plan documents.