The IRS announced on May 12 guidance to allow temporary changes to employer-sponsored “cafeteria plans” that are authorized under Internal Revenue Code Section 125.
Among the most important changes are extending the claims period for health care flexible spending arrangements (HCFSAs) and dependent care flexible spending arrangement (DCFSAs) and allowing for HCFSA and DCFSA enrollees in 2020 to make mid-year 2020 changes.
Federal employees have access to both the HCFSA (also the Limited Expense FSA or LEXFSA which reimburses the enrollee for out-of-pocket dental and vision expenses only) and the DCFSA through the Federal Flexible Benefits Plan (“FedFlex”). Federal employees who choose to participate in “FedFlex” program do so through FSAFEDS (www.fsafeds.com).
Since the IRS changes do apply to FedFlex, it is important to discuss these changes for those federal employees currently enrolled in FSAFEDS during 2020.
The IRS guidance and changes are contained in IRS Notice 2020-29 and IRS Notice 2020-33. IRS Notice 2020-29 provides greater flexibility for employees by:
(1) Extending claim periods for employees to apply unused amounts in a HCFSA or a DCFSA for expenses incurred for those same qualified benefits through Dec. 31, 2020;
(2) expanding the ability of employees to make mid-year elections for out-of-pocket medical expenses – HCFSAs, and for dependent care expenses – DCFSAs, allowing them to respond to changes in needs as a result of the COVID-19 pandemic; and
(3) applying earlier relief for high deductible health plans to cover expenses related to COIVD-19 and a temporary exemption for telehealth services retroactive to January 1, 2020.
IRS Notice 2020-33 responds to Executive Order 13877 which directs the Secretary of the Treasury to issue guidance to increase the amount of HCFSA funds that can carry over without penalty at the end of the year for flexible spending arrangements. The notice increases to limit for unused HCFSA carryover amounts from $500 to a maximum of $550, as adjusted for inflation. Note that the HCFSA per employee maximum for 2020 is $2,750 and that the deadline to implement the maximum rollover amount change from $500 to $550 (must be done by written plan amendment) is Dec. 31, 2020.
An FSA plan such as FedFlex may adopt this optional change via a Summary of Material Modifications (SMM) which can be mailed or e-mailed. It is important to emphasize that an employer can make these changes to their FSA plans but they are not by law required to do so.
To fully understand the consequences of IRS Notice 2020-29, it is important to review the rules of FedFlex program. Enrolling in both the HCFSA and the DCFSA is voluntary. There is an “open season” held each year in which employees have to enroll, or to reenroll, in the HCFSA, DCFSA, or both. They also have to decide how much of their paychecks they want to be deducted to contribute to the HCFSA, DCFSA, or both.
For 2020, the FedFlex “open season” was held between Nov. 11 and Dec. 16, 2019. Employees could set aside via payroll deduction for plan year 2020 a maximum $2,750 to the HCFSA and a maximum $5,000 to the DCFSA. Federal agencies make no contributions to the HCFSA and to the DCFSA on behalf of employees.
Under the rules for FedFlex, once an employee makes an election to participate and how much they choose to contribute each pay period in the forthcoming plan year, the election is irrevocable. The amounts contributed each pay period to both the HCFSA and the DCFSA cannot be changed unless there is a “qualifying life event (QLE).” Payroll deduction for HCFSA and DCFSA contributions start the first pay period of January.
Finally, there is a ‘use of lose” rule with respect to the HCFSA and DCFSA. This means that the funds in the HCFSA and DCFSA have to be used up by December 31st. However, an HCFSA enrollee has the option under current rules to carryover a maximum $500 of unused HCFSA funds into the next plan year.
With this background information in mind, the consequences of IRS Notice 2020-29 and IRS Notice 2020-33 for federal employees with respect their “FedFlex” HCFSAs and DCFSAs can now be discussed. If FedFlex adopts the changes as outlined in IRS Notice 2020-29, then a federal employee participating in the FedFlex program can revoke an election, make a new election, or decrease or increase an existing payroll allocation to an HCFSA on a prospective basis (that is, from the time of the election through Dec. 31, 2020).
Similarly, a federal employee can revoke an election, make a new election or decrease or increase an existing contribution to a DCFSA on a prospective basis (that is from the time of the election through Dec. 31, 2020).
Due to the nature of the public health emergency posed by the COVID-19 pandemic – in particular the unanticipated changes in the availability of certain medical care and dependent care – employees may be more likely to have unused HCFSA and/or DCFSA amounts at the end of 2020. These employees may want to either: (1) reduce their current HCFSA and/or DCFSA allocations; or (2) wish to have an extended period after Dec. 31, 2020 to use unused HCFSA and DCFSA amounts.
As of this writing, there has been little information on the FSAFEDS Web site (www.fsafeds.com) concerning a mid-year “open season” to allow employees to make new elections in the FSAFEDS program that will apply for the rest of 2020. On April 1, 2020, there was an announcement on the Web site regarding the DCFSA. The announcement stated that if a DCFSA enrollee has to make a mid-year election as a result of a QLE, then the enrollee can increase or decrease their 2020 DCFSA election amount, made during the previous “open season.” A QLE is the result of:
· the enrollee experiences a change in employment status for himself or herself, a spouse, or a dependent; or
· a change in the cost or coverage of the enrollee’s dependent care services.
The change to the DCFSA enrollee’s account must be consistent with the reason for the change. For example, if a dependent care provider as a result of the COVID-19 pandemic is no longer providing care (i.e. before/after care/daycare/nursery school closes, summer day camp cancels, or care is no longer needed) then the amount allocated to the DCFSA can be reduced. Similarly, if the enrollee needs supplemental care or adult care due to an increase in hours worked (for example, a physician or nurse working overtime at a VA hospital treating COVID-19 patients), the enrollee may increase the amount allocated to the DCFSA subject to the maximum amount of $5,000.
But there have been no official announcements from OPM or on the FSAFEDS Web site regarding making changes to one’s HCFSA (or LEXFSA) as a result of the COVID-19 pandemic. Unless an enrollee in HCFSA has experienced a QLE related to their health care coverage (resulting from the COVID-19 pandemic), no changes can be made mid-year to one’s HCFSA. An example of changes to one’s health care related to the COVID-19 pandemic would be the forgoing of routine medical care or elective surgery because of fears of going to a doctor’s office. Another example would be is the cancellation of scheduled dental or orthodontic visits because these offices have been closed during the COVID-19 pandemic.
Finally, unless FedFlex adopts the official change as authorized in IRS Notice 2020-33, no more than $500 of unused HCFSA funds can be carried over to plan year 2021. HCFSA enrollees are encouraged at this time to account for the amounts of their HCFSAs they have used so far in 2020 and project ahead as to how much they and their families will be using for the rest of 2020.
It is possible that the FedFlex program through FSAFEDS will change the maximum rollover amount from $500 to $550. But in case the change is not made, then HCFSA enrollees should perhaps spend more of their HCFSA funds between now and Dec. 31, 2020 in order to stay below the current $500 rollover cap.