On May 12, 2020, in response to the COVID-19 pandemic, the Internal Revenue Service (“IRS”) issued two notices, Notice 2020-29 and Notice 2020-33, providing relief and guidance to employers sponsoring Section 125 cafeteria plans, health flexible spending accounts, dependent care assistance programs, and qualified high deductible health plans.
Notice 2020-29 provides increased flexibility for cafeteria plans (and relatedly, health plans, health FSAs and dependent care FSAs) and also clarifies some COVID-19 related provisions related to health savings account (HSA)-eligible high deductible health plans (HDHPs). The guidance in this notice is specific to the COVID-19 crisis and is provided “to assist with the nation’s response to” COVID-19.
Notice 2020-33, released simultaneously, modifies the permissive carryover rule for health FSAs and includes a clarification regarding reimbursements of premiums by individual coverage health reimbursement arrangements (individual coverage HRAs). The guidance in this notice is not specific to the COVID-19 crisis.
Together the notices:
  • Permits mid-year election changes during the 2020 calendar year for health coverage, health FSAs, and DCAPs as a result of the COVID-19 pandemic.
  • Extends claim periods for employees to apply unused amounts remaining in a health FSA or DCAP for expenses incurred for those same qualified benefits through December 31, 2020.
  • Clarifies that the relief for HDHPs to cover expenses related to testing for and treatment of COVID-19 and the temporary exemption for telehealth services apply retroactively to January 1, 2020. 
  • Increases the limit of unused health FSA carryover amounts to $550 from $500.
Notice 2020-29 provides flexibility surrounding mid-year election changes made during calendar year 2020. Under this relief an employer may amend their Section 125 plan to allow the following:
  • Make a new election for employer-sponsored health coverage, where the employee had initially declined to elect such coverage.
  • Revoke an existing election for employer-sponsored health coverage and make a new election to enroll in different health coverage sponsored by the employer (including changing enrollment from self-only coverage to family coverage). 
  • Revoke an existing election for employer-sponsored health coverage, provided that the employee must attest in writing that he or she is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer. 
  • With respect to a health FSA election, revoke an election, make a new election, or decrease or increase an existing election.
  • With respect to a DCAP election, make a new election or decrease or increase an existing election.
  • Provide for an extended period during which a participant may apply unused amounts remaining in a health FSA or DCAP to pay or reimburse medical care expenses or dependent care expenses incurred through December 31, 2020 when the plan year or grace period ends in 2020. Example: a calendar year FSA running January 1, 2019 to December 31, 2019 has a grace period that would end on March 15, 2020. Employers may amend the plan to allow unused amounts remaining in the plan on March 15, 2020 to be applied to expenses incurred up to December 31, 2020. This provision applies to grace periods and plans with carryovers.
If an employer adapts these changes, they are not required to allow participants unlimited changes, it may determine the extent to which election changes are permitted and applied, as long as such changes apply prospectively and comply with the Section 125 nondiscrimination rules.
Diversified Group’s Response:  We would recommend allowing for election changes to the DCAP account but would advise caution regarding allowing mid-year health FSA changes. If you are so inclined, to avoid adverse selection, we would suggest limiting the election changes only for circumstances where the employee’s coverage would be increased or improved as a result of the change.
Notice 2020-33 addresses health FSA carryover provisions:
 This notice increased the carryover limit for unused amounts remaining in a health FSA as of the end of a plan year from a maximum of $500 to $550. This equates to 20 percent of the maximum health FSA salary reduction contribution for that plan year ($2,750 in 2020). Accordingly, the maximum unused amount from a plan year starting in 2020 allowed to be carried over to the immediately following plan year beginning in 2021 is $550.
CARES Act – Over the Counter Drug Coverage
 The CARES Act allows plans to amend their FSA (or use HSA funds) to allow the purchase of over-the-counter medications without a prescription, such as, pain relievers, heartburn medications, allergy relief and more, for the first time since 2011. Plans can also allow funds to be used for feminine care products for the first time. The Act does this by eliminating the Medicine Cabinet Tax, a provision in the Affordable Care Act (ACA) that said any OTC medical product paid for with pre-tax dollars from a Health Flexible Spending Arrangement (FSA), Health Reimbursement Arrangement (HRA) or Health Savings Account (HSA) must have a doctor’s prescription. This is a permanent change and would require a plan document update to include the coverage.
 Employers will have to amend their Section 125 plan documents to initiate any of these design changes. Amendments must be adopted on or before December 31, 2021 and may be retroactive to January 1, 2020. 
Diversified Group’s Response:  If you are a Diversified Group FSA administration client, you will be receiving a notice shortly that will allow you to adopt one or all of the changes above. 
DG Compliance