Payroll Briefs

IRS Issues Changes to Cafeteria Plans, FSA Claims Period and HSA Limits

July 13, 2020

In light of the COVID-19 crisis, the Internal Revenue Service (IRS) has issued new guidance pertaining to cafeteria plan changes, health flexible spending arrangements (FSAs) and health savings accounts (HSAs) in IRS Notice 2020-29 and Notice 2020-33. The new guidance provides flexibility to employees across the country as businesses continue to navigate the current health climate. DM Payroll Solutions further explores these new changes to keep you updated and cognizant of the options available to your employees.

Cafeteria Plan and FSA Changes

As the COVID-19 health crisis continues to affect our country, employees now have the opportunity to make mid-year cafeteria plan changes. Cafeteria plans allow employees to decide between money (a salary, for example) or specific qualified benefits, including contributing funds toward an FSA, paying their insurance premiums, allocating childcare expenses and more, all on a pre-tax basis. Typically, cafeteria plan elections must be made during open enrollment periods prior to the plan’s effective year. Once a plan begins, new elections can only be made in certain situations.

Since COVID-19 has presented unforeseen changes in insurance coverage and access to medical care, employers can allow employees to change their coverage to ease any medical burdens they may be experiencing. Some of the changes in coverage now available to employees include:

  • Making a new election in their employer-sponsored healthcare coverage if they initially declined to enroll in a plan
  • Changing their existing healthcare coverage election (including adding family coverage, upgrading to a better plan, etc.)
  • Revoking existing coverage in favor of a new plan not sponsored by the employer
  • Changing health FSA coverage
  • Making a new election for dependent care assistance programs

Changing coverage mid-year is retroactive to Jan. 1, 2020, so elections made earlier in the year are permitted. Notice 2020-29 does not require employers to make these changes, but they can limit elections to circumstances which increase or improve employees’ coverage (for example, changing from individual coverage to family coverage). Employers may also limit elections for health FSAs and dependent care programs so full-year contributions are no less than the amounts which have been previously reimbursed.

Additionally, Notice 2020-33 increased the amount of unused FSA funds which can be carried into the following year. The original amount was $500, but the new guidance now allows for $550 for 2020 plans as a cost of living increase. Claims periods have also been extended for health FSAs and dependent care programs, allowing employees more time to apply their unused funds. Employees may use funds still available at the end of a grace period that ends in 2020 to pay or reimburse expenses incurred up until Dec. 31, 2020. Employers have the option to couple this rule with the carryover of limited amounts from 2020 to 2021. Since plans cannot typically use the carryover rule and grace period rule in tandem, the new guidance allows FSA and dependent care plans to use both.

Plan Amendment Timeline

It is employers’ responsibility to notify their eligible employees to participate in a cafeteria plan or to make changes to their existing plan, as well as the time period in which new elections must be made. Cafeteria plans must be amended by employers no later than Dec. 31, 2021 and amendments will be retroactive to Jan. 1, 2020. Mid-year election changes and FSA/dependent care program changes are limited to the 2020 calendar year and must be in operated in accordance with Notice 2020-29 and Notice 2020-33.

IRS Issues HSA Limits for 2021

On top of the new guidance for cafeteria plans and FSA updates, the IRS has also released the inflation-adjusted limits for 2021 HSAs. Note: qualifying filers can still make contributions to their 2019 HSAs through the quickly approaching Jul. 15, 2020 deferred tax filing deadline. The new amounts (compared with the 2019 and 2021 amounts) are as follows:

         2019        2020           2021
HSA Contribution limit: Single plans $    3,500 $    3,550 $        3,600
HSA Contribution limit: Family plans $    7,000 $    7,100 $        7,200
Minimum deductible: Single plans   $    1,350 $    1,400 $        1,400
Minimum deductible: Family plans $    2,700 $    2,800 $        2,800
Out-of-pocket cap: Single plans $    6,750 $    6,900 $        7,000
Out-of-pocket cap: Family plans $  13,500 $  13,800 $      14,000

Keeping You Informed

With these favorable new adjustments to cafeteria plans, FSAs and HSAs, many employees will benefit from the increased flexibility. DM Payroll Solutions is committed to keeping you and your staff up-to-date with the latest guidance from the IRS during this new COVID-19 era. To learn more about how to successfully administer and manage these new changes in benefits, contact us today.