IRS Creates Cafeteria Plan, HDHP Flexibilities Due to COVID-19

The Internal Revenue Service (IRS) has issued guidance extending flexibilities to high deductible health plan (HDHP), employer-sponsored cafeteria plan, and flexible spending arrangement (FSA) plan members.

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“The guidance issued today addresses unanticipated changes in expenses because of the 2019 Novel Coronavirus (COVID-19) pandemic,” the press release explained.

Between rising unemployment and high coronavirus testing and treatment costs—even with employer-sponsored health plans—the coronavirus pandemic has placed many Americans under fiscal pressure.

Under the guidance, employers can set mid-year elections for their cafeteria plans, during which employees elect what benefits they want to receive from their employer. The guidance also adjusted carryovers and grace periods. Lastly, the IRS extended the telehealth and remote services exemption for HDHPs, retroactively. The flexibilities are designed to give employees a much needed financial break.

Employer-Sponsored Cafeteria Plan Mid-Year Elections Established

Cafeteria plan members are now allowed to make a mid-year election. Cafeteria plans can offer solutions for targeted populations, such as those in need of long-term care. In a cafeteria plan, employees contribute some of their salary toward the employer-sponsored health plan benefits of their choice, which can include health coverage.

The new mid-year election opens an opportunity for those who did not choose to make contributions toward healthcare coverage in the normal elections cycle—which ended before the coronavirus outbreak—to do so or to revoke their enrollment or enroll in a different health coverage plan on a prospective basis.

Under the new flexibility, employers may allow employees to adjust their cafeteria plans to:

• Make a new prospective election period for employees who did not elect for the employer-sponsored health plan
• Revoke an election and prospectively elect a different employer-sponsored health plan for both the employee and the employee’s family
• Revoke an election and not enroll in an employer-sponsored health plan but confirm in writing that the employee will enroll in a non-employer-sponsored health plan; the guidance also provides a sample attestation that an employee can sign
• Prospectively revoke and re-enroll or adjust an existing election with an FSA or dependent care assistance program

The guidance advised employers to adjust their elections in such a way that prevents adverse employee selection.

Cafeteria Plans Can Adjust Carryovers or Grace Periods

Those who are enrolled in a cafeteria plan FSA may not have used all of their FSA funds for the previous plan year. The IRS will allow those enrolled in a cafeteria plan, which may be paired with an FSA or a dependent care program, to put any unused funds toward medical care or dependent care.

Alternatively, the cafeteria plan could impose a grace period. The grace period would allow unused funds to be applied toward care expenses for a certain period of time following the end of the plan year.

Typically, these allowances are subject to some restrictions, such as setting the carryover limit is at $550, only allowing members to apply grace period funds toward the same qualified benefits from which they carry over, mandating that grace period funds must be used within two months and 15 days of the plan year end, and disallowing employers from offering both a carryover and a grace period.

Under the new guidance, cafeteria plans with a plan year ending in 2020 can allow members to apply leftover funds to medical costs or dependent care through December 31, 2020.

However, this new guidance also has some restrictions, namely:

• FSA carryover amounts can only be used for medical care
• Dependent care assistance program carryover amounts can only be contributed toward dependent care
• The $550 carryover limit remains in effect
• The restriction against offering implementing both a carryover and a grace period remains in effect

HDHP Telehealth Exemption Retroactively Extended

The IRS also retroactively extended an exemption for telehealth and remote services for HDHPs, established in the Coronavirus Aid, Relief, and Economic Security (CARES) Act. HDHPs have developed a dissatisfied consumer base over the years, with 28 percent of employees saying that their HDHP deductibles would be challenging to meet.

The CARES Act allowed HDHPs to cover telehealth and remote services as early in the year as March 27, 2020 for plan years starting on or before December 31, 2021.

With this guidance, however, the exemption now covers telehealth services back to January 1, 2020 for plan years starting on or before December 31, 2021.

If an employer does make any changes to its plans in congruence with these IRS flexibilities, they have to implement a formal plan amendment by December 31, 2021. The amendment can apply retroactively through January 1, 2020.