IRS Offers Extra COVID-19 Aid for Cafeteria Plans | McDermott Will & Emery


As mentioned in our On the Topic, the Consolidated Appropriations Act (the CAA) establishes momentary particular guidelines for FSAs, akin to giving employers the choice to amend their cafeteria plans and well being FSAs and DCAPs to permit workers to hold over unused quantities into 2021 and 2022 or prolong the grace interval in 2021 and 2022. The CAA additionally contains the choice to make potential election adjustments for plan years ending in 2021, with out regard as to if the worker experiences a change in standing, and quite a few different adjustments.

IRS Discover 2021-15 clarifies the remedy of carryovers of FSA and DCAP funds, prolonged grace intervals, post-termination well being FSA reimbursements and DCAP age restrict aid. The steering additionally explains:

  • How workers could make potential mid-year election adjustments to FSAs for plan years ending in 2021
  • How an employer could amend a number of of its cafeteria plans to undertake these new provisions
  • Choices to protect well being financial savings account (HSA) eligibility for well being FSA carryovers and prolonged grace intervals
  • How the carryovers and prolonged grace intervals work together with different guidelines, akin to nondiscrimination guidelines
  • Type W-2 reporting necessities for DCAPs
  • How employers can amend their plans to undertake the Coronavirus Help, Aid and Financial Safety Act (the CARES Act) provision permitting bills incurred for over-the-counter medication and menstrual care merchandise to be handled as incurred for medical care with respect to well being FSAs and HSAs.

McDermott Callout: These provisions are solely on the discretion of the employer. Not one of the choices above are necessary. We propose checking in with workers and operating forfeiture studies to find out in case your workers would profit from this Discover.

FSA/DCAP GRACE PERIODS AND CARRYOVERS

An employer, in its discretion, could amend its Part 125 cafeteria plan to supply a carryover of all or a part of the unused quantities remaining in a well being FSA or DCAP as of the top of a plan 12 months ending in 2020 or 2021 into the subsequent plan 12 months.

The IRS supplied the instance of an employer that sponsored a calendar 12 months cafeteria plan in 2020 with a well being FSA that gives for a $550 carryover. On this case, the employer could amend the plan to hold over your complete unused quantity remaining in an worker’s well being FSA as of December 31, 2020, to the 2021 plan 12 months (even when that quantity exceeds $550). Equally, the employer additionally could amend the plan to hold over your complete unused quantity remaining in an worker’s well being FSA as of December 31, 2021, to the 2022 plan 12 months.

This Discover applies to all well being FSAs, together with limited-purpose well being FSAs, in addition to all DCAPs. Nonetheless, well being FSA quantities could also be used just for medical care bills, whereas DCAP quantities could also be used just for dependent care bills. Additional, the aid is on the market for plans which have a grace interval or carryover in addition to people who haven’t adopted both function. The rule prohibiting the implementation of each a grace interval and a carryover remains to be in impact and can apply in full to those plans once more as soon as the aid within the Discover ends. An employer that decides to undertake this elective aid could restrict the carryover to an quantity lower than all unused quantities and/or could restrict the carryover to use solely as much as a specified date through the plan 12 months.

The Consolidated Omnibus Price range Reconciliation Act (COBRA) election rights for a well being FSA is not going to be impacted the grace interval extension or carryover aid. As well as, if an employer adopts the carryover or grace interval extension allowed underneath the CAA (the relevant COBRA premium payable to supply entry to such carryover quantities) the quantity attributable to the prolonged interval is zero. Quantities carried over or out there through the prolonged interval for incurring claims are included within the quantity of advantages to which a certified beneficiary is entitled through the the rest of a plan 12 months through which a qualifying occasion happens. In accordance with the in any other case relevant guidelines, for plan years ending in or after 2022, the carryover is on the market just for a well being FSA and isn’t out there for a DCAP.

McDermott Callout: The steering offers for lots of flexibility for employers eager to implement these choices; nonetheless, the IRS holds agency on the concept that a plan could not provide a grace interval and a carryover. The IRS additionally held agency on HSA eligibility (see under).

HSA ELIGIBILITY AND CARRYOVERS/GRACE PERIODS

Sadly, for functions of figuring out whether or not an eligible particular person is certified to contribute to an HSA, the carryover of unused quantities to the 2021 plan 12 months or the 2022 plan 12 months is an extension of the protection a well being plan that isn’t a high-deductible well being plan (besides within the case of an HSA-compatible well being FSA, akin to a limited-purpose well being FSA). Subsequently, a person isn’t eligible to contribute to an HSA throughout a month through which they take part in a general-purpose well being FSA to which unused quantities are carried over pursuant to this Discover. Observe, nonetheless, that the IRS signifies that people could decide out of any such carryover or grace interval to protect their HSA eligibility.

EXTENDED CLAIMS PERIOD AFTER TERMINATION OF PARTICIPATION IN FSA

A well being FSA could permit an worker who ceases participation within the plan throughout 2020 or 2021 to proceed to obtain reimbursements from unused advantages or contributions the top of the plan 12 months through which participation ceased (together with any grace intervals). DCAPs presently have this potential.

An employer could select to undertake an prolonged interval for incurring claims that’s lower than 12 months, and an employer could select to undertake a interval that ends earlier than the top of the plan 12 months throughout which workers who’ve ceased participation in a plan could proceed to obtain reimbursements.

The employer, in its discretion, is permitted to restrict the unused quantities within the well being FSA to the quantity of wage discount contributions the worker had constructed from the start of the plan 12 months through which the worker ceased to be a participant as much as the date the worker ceased to be a participant. This selection is on the market for an worker who ceases to be a participant as the results of (i) termination of employment, (ii) change in employment standing or (iii) a brand new election throughout 2020 or 2021. The extension interval is restricted to the top of the plan 12 months through which participation ceased (together with any grace interval).

Topic to the nondiscrimination guidelines underneath Code Sections 125 and 129, employers could undertake this aid for some, however not all, well being FSA or DCAP members. Quantities carried over or out there throughout an prolonged claims interval are usually not taken into consideration for functions of the nondiscrimination guidelines relevant to cafeteria plans and DCAPs underneath Code Part 129.

SPECIAL AGE LIMIT RELIEF APPLICABLE TO CARRYOVER RELIEF FOR DEPENDENT CARE ASSISTANCE PROGRAMS

The CAA offers that within the case of sure workers, “age 14” replaces “age 13” for functions of figuring out the dependent care help which can be paid or reimbursed throughout (A) the final plan 12 months for which the top of the common enrollment interval for such plan 12 months was on or earlier than January 31, 2020, and (B) within the case of an worker who has an unused steadiness in a DCAP for such plan 12 months (decided as of the shut of the final day on which, underneath the phrases of the plan, claims for reimbursement could also be made with respect to such plan 12 months), the following plan 12 months. Employers could restrict the reimbursements underneath the DCAP to the quantities paid for dependent care help that doesn’t exceed the worker’s unused steadiness.

Solely sure workers are eligible for this aid: workers who (A) are enrolled in a DCAP for the final plan 12 months for which the top of the common enrollment interval for the plan 12 months was on or earlier than January 31, 2020, and (B) have a number of dependents (as outlined in Code Part 152(a)(1)) who attain the age of 13 both (i) throughout that plan 12 months or (ii) within the case of an worker who has unused dependent care quantities for that plan 12 months (decided as of the shut of the final day on which, underneath the phrases of the plan, claims for reimbursement could also be made with respect to that plan 12 months), through the subsequent plan 12 months.

ELECTIONS UNDER A CAFETERIA PLAN

Topic to sure limitations, an employer could amend a number of of its cafeteria plans to permit workers, on a potential foundation, to (1) revoke an election, make a number of elections or improve or lower an present election, for plan years ending in 2021 concerning a well being FSA or (2) revoke an election, make a number of elections or improve or lower an present election, for plan years ending in 2021 concerning a DCAP.

Potential election adjustments could embody an preliminary election to enroll in a well being FSA or DCAP for the 12 months, for instance, to achieve use of the carryover or prolonged interval for incurring claims (mentioned above) if the worker initially declined to enroll within the well being FSA or DCAP for the 12 months.

An employer adopting this aid could restrict the interval throughout which election adjustments could also be made. An employer adopting this elective aid might also restrict the extent to which election adjustments are permitted, so long as such limits are carried out in a nondiscriminatory approach (e.g., limiting elections to circumstances through which an worker’s protection will likely be elevated or improved on account of the election, akin to electing to vary from self-only protection to household protection, or from an in-network plan to a plan that covers bills in- or out-of-network). The Discover additional offers extra aid with respect to mid-year elections for employer-sponsored well being protection. For plan years ending in 2021, a Part 125 cafeteria plan could allow eligible workers to: (1) make a brand new election on a potential foundation, if the worker initially declined to elect employer-sponsored well being protection, (2) revoke an present election and make a brand new election to enroll in numerous well being protection sponsored the identical employer on a potential foundation or (3) revoke an present election on a potential foundation, supplied that the worker attests in writing that the worker is enrolled, or instantly will enroll, in different well being protection not sponsored the employer.

Cafeteria plans could permit potential mid-year election adjustments throughout plan years ending in 2021 in any of the next conditions:

  1. New elections for employer-sponsored well being protection workers who initially declined protection.
  2. Elections to enroll in numerous well being protection sponsored the identical employer (together with a change from self-only to household protection).
  3. Revocation of present elections for employer-sponsored well being protection, with a written attestation that the worker is or instantly will likely be enrolled in different well being protection not sponsored the employer.

That is just like aid issued the IRS in IRS Discover 2020-29 as described in our earlier article right here. The Discover contains pattern attestation language. Employers could depend on the worker’s written attestation except the employer has precise information that the worker isn’t or is not going to be enrolled in different complete well being protection not sponsored the employer.

McDermott Callout: Employers will need to present discover to workers of any modifications made to the plan underneath this steering, most certainly within the type of a Abstract of Materials Modifications (SMM).

PLAN AMENDMENTS

An employer that decides to implement this elective aid for its cafeteria plan (together with plans that don’t presently have a grace interval or allow a carryover) should undertake a plan modification to take action. Typically, amendments to cafeteria plans must be adopted previous to the efficient date of the modification. Nonetheless, an modification could also be adopted retroactively for these provisions, if (1) the modification is adopted not later than the final day of the primary calendar 12 months starting after the top of the plan 12 months through which the modification is efficient and (2) the plan or association is operated per the phrases of the modification through the interval starting on the efficient date of the modification and ending on the date the modification is adopted.

The IRS supplied the instance of an employer that sponsors a calendar 12 months cafeteria plan with a well being FSA that gives for a $550 carryover (from 2020 to 2021) and amends the plan to hold over your complete unused quantity remaining in workers’ well being FSAs as of December 31, 2020, to the 2021 plan 12 months. On this case, the modification have to be adopted December 31, 2021. Nonetheless, for a non-calendar 12 months plan, an modification for the 2020 plan 12 months have to be adopted December 31, 2022, as a result of the final day of the primary calendar 12 months starting after the top of the 2021 plan 12 months is the final day of 2022.

REPORTING REQUIREMENTS FOR DCAPS

Quantities contributed to a DCAP are required to be reported in Field 10 of Type W-2. Employers could report in Field 10 the annual wage discount quantity elected an worker for dependent care help, with out adjusting the quantity reported in Field 10 to bear in mind quantities that stay out there in a grace interval. This rule continues to use with respect to employers who amend their cafeteria plans to supply for the momentary flexibility supplied the CAA.

MEDICAL EXPENSES

The CARES Act amended the Code to permit well being FSAs, HSAs, well being reimbursement preparations (HRAs) and Code Sec. 220 Archer medical financial savings accounts (MSAs) to reimburse bills incurred for menstrual care merchandise and over-the-counter medication with out regard as to if the drug has been prescribed to be handled. This enlargement applies to bills incurred after December 31, 2019.

Well being FSAs and HRAs could also be amended pursuant to this Discover to supply for reimbursements of bills for menstrual care merchandise and over-the-counter medication with out prescriptions incurred for any interval starting on or after January 1, 2020.

The Discover offers welcome steering concerning the applying of aid supplied the CAA.



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