May 31, 2020

Employers Can Change Aspects of Certain Health Programs to Benefit Employees

By Theodore Ginsburg, Principal, Tax & Business Services

Employers Can Change Aspects of Certain Health Programs to Benefit Employees Compensation & Benefits Consulting

On May 12, the Internal Revenue Service (IRS) issued IRS Notices 2020-29 and 33, giving employers the ability to modify existing health programs to assist employees. These changes are now being allowed by the IRS in response to the Coronavirus pandemic.

The guidance impacts two distinct areas:

Mid-year employee changes for health plan coverage

Many employers offer employee benefits through an Internal Revenue Code Section 125 cafeteria plan, which allows employees to select different types of benefits and pay for them using salary reductions. Those elections are typically made before the beginning of the year (during open enrollment) and remain in effect for the entire year. The guidance now allows employers to permit employees to change their elections mid-year on a prospective basis, as follows:

  • If an employee initially declined health coverage, the employee can now elect coverage.
  • An employee who had elected coverage can revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer.
  • An employee who had elected coverage can revoke an existing election, if the employee states that he/she is enrolled, or immediately will enroll, in other health coverage.

Flexible Spending Accounts (FSAs)

Employers who sponsor non-high deductible healthcare arrangements will often offer FSAs to their employees, to allow them to contribute funds, on a pre-tax basis, which can be used to defray some of their eligible healthcare expenses. Additionally, FSAs can also be offered by an employer to help its employees with dependent care expenses. The IRS will allow the following changes to an FSA:

  • An employee can revoke an election, make a new election, or change the contribution amount elected for FSA dependent care assistance.
  • An employee can prospectively revoke an election, make a new election, or change the contribution amount elected for a health FSA. The ability to make these changes is only effective for the 2020 year.
  • The amount of unused FSA contributions at the end of a plan year that can be carried over to the following year is increased from $500 to $550.
  • FSA carryovers from 2019 can be used for eligible expenses incurred during 2020; prior to this change, carryovers had to be used within 75 days after year-end or the funds were forfeited.

The notices can be found at:
https://www.irs.gov/pub/irs-drop/n-20-29.pdf
https://www.irs.gov/pub/irs-drop/n-20-33.pdf

Employers are not required to offer these changes, but employers that choose to make these changes will have a short timeframe in which to implement them. Interested employers should contact their FSA custodians, insurance brokers or third party administrators to discuss the implementation of the changes as soon as possible.

Marcum’s compensation and benefits advisors can provide you with more detailed information relating to retirement plan issues. Contact your Marcum professional for assistance.

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Related Industry

Healthcare