IRS Increases Flexibility for Section 125 Cafeteria Plans

On May 12, the Internal Revenue Service (IRS) released two notices providing temporary increased flexibility for Section 125 Cafeteria Plans, health plans that allow workers to choose from a variety of benefits on a pre-tax basis.

The first notice, Notice 2020-29, provides relief for taxpayers who are experiencing changes in their expenses due to the COVID-19 public health emergency. With the new guidance, the IRS is allowing taxpayers to use the remaining funds in their health Flexible Spending Arrangements (FSAs) or dependent care assistance programs for expenses incurred with respect to those programs through December 31, 2020. The notice also allows taxpayers to make mid-year elections for health coverage, health FSAs and dependent care assistance programs to allow them to better adapt their coverage for COVID-19-related needs.

Additionally, Notice 2020-29 retroactively applies previously issued relief with respect to high deductible health plans (HDHPs) to January 1, 2020. Notice 2020-15, “High Deductible Health Plans and Expenses Related to COVID-19,” allowed HDHPs to provide COVID-19 testing without a deductible and without jeopardizing the status of the plan as an HDHP. Section 3701 of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, “Exemption for Telehealth Services,” allowed remote care services, such as telehealth services, to qualify for reimbursement by HDHPs.

The second notice, Notice 2020-33, “Executive Order on Improving Price and Quality Transparency in American Healthcare to Put Patients First,” was issued in response to President Trump’s Executive Order 13877. The Executive Order called on the Secretary of the Treasury to “issue guidance to increase the amount of funds that can carry over without penalty at the end of the year for flexible spending arrangements.” Notice 2020-33 increases the amount of unused funds in a health FSA that can be carried over to the new year from $500 to $550.