IRS Explains COVID-19 Relief Options Under Cafeteria Plans

The IRS has issued an information letter that responds to an inquiry from a health FSA participant who was concerned about having unused health FSA amounts because “services are not open” due to COVID-19. The participant asked for an extension of time beyond the end of the plan year to use the amounts. The letter explains that IRS Notice 2020-29 permits employers to amend their cafeteria plans to (1) extend the health FSA claims period to the end of 2020; and (2) provide employees with additional flexibility to make midyear election changes during 2020, including revoking, increasing, or decreasing a health FSA election (see our Checkpoint article). In addition, IRS Notice 2020-33 increases the maximum health FSA carryover amount and permits employers to amend their cafeteria plans to adopt the increased amount (see our Checkpoint article). The letter also notes that while these amendments are permitted, employers are not required to make them.

EBIA Comment: This IRS information letter does not break new ground or include any surprises. However, it is a useful reminder that employers wishing to take advantage of the cafeteria plan relief that the IRS has provided in response to the COVID-19 health crisis must amend their plans to do so. Keep in mind that the relief does not alter key cafeteria plan principles: retroactive election changes generally are not permitted, and unused contributions must be forfeited subject to limited exceptions (e.g., for health FSA carryovers or a grace period). For more information, see EBIA’s Cafeteria Plans manual at Sections XIV.A.4 (“COVID-19-Related Election Change Relief for Calendar Year 2020”) and XVI.N.2 (“Extended Period for Incurring Health FSA and DCAP Expenses (Discretionary)”).

Contributing Editors: EBIA Staff.