NEW COVID-19 Guidance For 125 Plans and HRA Premium Expense Reimbursement

In Notice 2020-29 released on May 12, 2020, the IRS provides expanded options for participants with respect to 2020 mid-year election changes and also provides increased flexibility to apply unused amounts in health FSAs to medical care expenses incurred through December 31, 2020, and unused amounts in dependent care assistance programs to dependent care expenses incurred through December 31, 2020. Although the temporary relief under Notice 2020-29 was issued in response to the COVID-19 health emergency, the relief is not limited to individuals affected by the pandemic. Specifically:

  • Section 125 Plans may be amended to allow prospective election changes during calendar year 2020 regarding employer-sponsored health coverage, a health FSA, or a dependent care assistance program, regardless of whether the basis for the election change satisfies the current regulatory criteria. Note: to accept an employee’s revocation of an existing health coverage election, the employer must receive a written attestation that the employee is enrolled, or immediately will enroll, in other comprehensive health coverage not sponsored by the employer. The notice provides a sample attestation for this purpose. This relief applies to periods before the notice was issued and on or after January 1, 2020.
  • Section 125 Plans may be amended to permit employees to apply unused amounts remaining in a health FSA or a dependent care assistance program as of the end of a grace period ending in 2020 or a plan year ending in 2020 to pay or reimburse expenses incurred for the same qualified benefit through December 31, 2020. Note: an individual who had unused amounts remaining at the end of a plan year or grace period ending in 2020 and who is allowed an extended period to incur expenses under a health FSA will not be eligible to contribute to an HSA during the extended period (except in the case of an HSA-compatible health FSA).

Notice 2020-33, also released on May 12, 2020, issued in response to President Trump’s Executive Orders increases the $500 health FSA carryover limit. Under this guidance, the maximum amount from a plan starting in 2020 allowed to be carried over to the following plan year starting in 2021 is $550. Notice 2020-33 also seeks to increase the usability of HRAs by clarifying the ability of a health plan (including a premium reimbursement plan in a 125 plan or an individual coverage HRA) to reimburse individual insurance policy premium expenses incurred prior to the beginning of the plan year for coverage provided during the plan year. Previously, a health plan could not reimburse medical expenses incurred before the beginning of the plan year and qualify for exclusion from income and wages.  Under this new guidance, a plan may treat a health coverage premium expense as incurred on (1) the first day of each month of coverage on a pro rata basis, (2) the first day of the period of coverage, or (3) the date the premium is paid. For example, an individual coverage HRA with a calendar year plan year may immediately reimburse a substantiated premium for health insurance coverage that begins on January 1 of that plan year, even if the covered individual paid the premium for the coverage prior to the first day of the plan year.

Amendments pursuant to Notice 2020-29 (permitting expanded mid-year election changes and additional time to incur expenses) and Notice 2020-33 (increasing the carryover limit to $550) for the 2020 plan year must be adopted on or before December 31, 2021, and may be effective retroactively to January 1, 2020; employers must also inform employees of these changes.

KMK Comment: These Notices provide welcome relief to participants who could not have anticipated changed circumstances due to the pandemic which has resulted in such events as the cancellation of an elective surgery or the closing of a day care. Note that a specific COVID-19 reason is not required to make a change. Also note that an employer is not required to permit these changes, but if the employer intends to adopt these rules allowing the mid-year changes, making a quick decision will be more beneficial to participants because changes are only effective on a prospective basis. This guidance does not permit amounts that have already been contributed to a Section 125 Plan to be returned to the participant. 

KMK Law articles and blog posts are intended to bring attention to developments in the law and are not intended as legal advice for any particular client or any particular situation. The laws/regulations and interpretations thereof are evolving and subject to change. Although we will attempt to update articles/blog posts for material changes, the article/post may not reflect changes in laws/regulations or guidance issued after the date the article/post was published. Please consult with counsel of your choice regarding any specific questions you may have.


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