IRS Allows Changes to Health Plans and Flex Accounts as Pandemic Takes Financial Toll

As business owners and workers adapt to the devastating effects of COVID-19, IRS relaxes rules on flexible spending accounts and medical plan enrollment

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Flexible spending accounts and healthcare enrollment are becoming even more flexible, thanks to the Internal Revenue Service.

In response to the devastating medical and financial burden caused by COVID-19, the IRS has eased its restrictions on changes to medical plan enrollment and flexible spending accounts (FSAs).

The IRS issued new guidance to help workers better adapt and plan for contingencies (for example, you put money away for summer camp that is no longer open).

Notice 2020-29 outlines changes that can be made to existing healthcare plans and FSA funds set aside for medical and dependent care expenses. The notice also increases the time length and amount of carryover allowed for flexible spending accounts for expenses incurred before December 31, 2020.

Important note: It’s up to the employer to open plans to allow workers to make eligible changes.

Providing mid-year elections for healthcare plans

The notice provides specific guidelines that expand workers’ ability to change their healthcare elections for coverage.

Typically, unless there was a qualifying event (marriage, divorce, birth or death) no changes were allowed to the elections employees made.

Because of the burden COVID-19 is placing on workers and their families, the updated IRS rules allow for mid-year enrollments and changes to existing plans.

Under the new guidance, companies that offer workers coverage through a 125 Cafeteria Plan may allow their staff to:

  • Enroll in an employer-sponsored plan during this outbreak if they had previously declined coverage
  • Revoke an existing plan election and enroll in different coverage that is provided by the employer
  • Revoke their enrollment in all company-sponsored plans, providing the employee provides written notice they are enrolled or will immediately become enrolled in an alternative healthcare plan not provided by the employer

Providing changes to FSAs during the outbreak

In order to provide workers with more financial flexibility, the guidance also allows changes to flexible spending accounts.

Some employees may need additional cash to meet their financial needs and may close their account temporarily. Others may see additional value in adding to the account based on prospective medical need. Still, others may find the amount they set aside for caregiver expenses will not be met due to shutdowns.

FSAs have traditionally been “use it or lose it” accounts, but the guidance allows for mid-year changes.

Flexible spending accounts (FSAs), health savings accounts (HSAs), health reimbursement arrangements (HRAs) and Dependent Care Flexible Spending Accounts (DCFSAs) allow workers to set aside pre-tax dollars into medical and dependent care spending accounts up to $2,750 for 2020 ($5,000 for workers married, filing jointly).

Unless there was a qualifying event, no changes were allowed to the monies deposited into the account(s) during the plan year. Under the new guidance, for medical accounts, employees may now:

  • Revoke their existing medical FSA
  • Enroll in a new medical FSA, or
  • Increase or decrease the amount they contribute to their existing FSA election

Because many daycare and other caregiving providers have been shuttered during the pandemic, the changes also allow employees to:

  • Revoke their existing dependent care FSA
  • Enroll in a new dependent care FSA, or
  • Increase or decrease the amount they contribute to their existing FSA election

Expansion of qualifying healthcare expenses

Under the recently passed CARES Act, medical expenses have been expanded. The CARES Act added to the types of medical expenses that qualify for reimbursement for  flexible spending accounts. The act repealed the “Medicine Cabinet Tax” provision of the Affordable Care Act. It also expands the list of qualifying purchases made under HSAs, FSAs, and HRAs.

Previously, only medicine prescribed by a physician qualified for reimbursement. The CARES Act now allows all over-the-counter medications to be reimbursable. This includes allergy medications, pain relievers, cold and flu medications and more.

Additionally, feminine hygiene products also qualify as reimbursable by funds set aside with a medical flex spending account. Currently, the changes allowed for medical and healthcare spending accounts are valid for expenses incurred after December 31, 2019 and through the end of the year.

Expansion of grace periods and allowances

Finally, the new notice from the IRS increases the amount of carryover for non-utilized expenses for 2020. Employees who do not use all their health or dependent care FSA funds may carry over up to $550 into 2021.

The guidance also allows for a new grace period of up to 2 months and 15 days after December 31 to submit receipts for reimbursement. The guidance allows FSA plan managers to provide the additional time, but it is not mandatory under the new ruling from the IRS. It will be up to plan administrators to determine whether or not to allow the expanded grace period.

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