IRS Issues Notice Permitting Mid-Year Changes Under Section 125 Cafeteria Plans

IRS Issues Notice Permitting Mid-Year Changes Under Section 125 Cafeteria Plans

briefing by Rhonda Skiles, CPA

As a part of its ongoing effort to provide relief during the coronavirus pandemic, the IRS recently issued Notice 2020-29.  This notice provides flexibility not previously available to employers and employees with regard to employee elections for employer sponsored health insurance coverage, Flexible Spending Arrangements (FSA’s) and dependent care assistance programs.  Section 125 Cafeteria Plans allow employees to choose to pay for certain health benefits with pre-tax wages and allow employees to defer pre-tax wages to pay qualified medical expenses and qualified child care expenses during the year.  Prior to this notice, employee elections under Section 125 Cafeteria Plans had to be made prior to the first day of the plan year and were irrevocable during the year, except in certain limited circumstances outlined under the Treasury Regulations for Section 125.  As a result of the pandemic, employees may have unforeseen increases or decreases in medical expenses and may have an increase or decrease in the need for child care as a result of school closures and remote working arrangements.  Under the provisions of this notice, employees may be able to make mid-year changes to their Section 125 elections to adjust for any needed changes.

Notice 2020-29 states that employers have the right to determine if they will amend their Section 125 plan documents.  If an employer amends their plan document, then their employees will be allowed to change their health coverage during the current plan year.  This means that employees can enroll in health coverage for the remainder of the year if they previously declined the coverage or change the type of health coverage going forward for this plan year.  Additionally, if an employee certifies in writing that they have other health coverage, then they can elect to decline their employer’s health coverage mid-year.  Additionally, employees can elect to change deferrals to FSA’s and dependent care assistance programs.  Deferrals can be started or stopped for the remainder of the year, or deferral amounts can be increased or decreased.

If the employer choses to do so, they can amend their Section 125 plan document to extend the grace period for unused funds in FSA’s or dependent care assistance programs.  The previous grace period for using funds from the most recent prior plan year was 2 ½ months after the end of the plan year.  Under this notice, the grace period can be extended to the end of the current plan year.  For example, under the prior rule, if the employer has a calendar year Section 125 plan, then unused funds, up to the amount allowed by the IRS, can be used to pay qualified expenses through March 15.  In this example, the amendment would extend the grace period to use unused funds to pay for qualified expenses through December 31.

If you are interested in reading a complete copy of Notice 2020-29, a link is provided below:  https://www.irs.gov/pub/irs-drop/n-20-29.pdf.

Please contact BRC if you have any questions or we may be of assistance with any of your employee benefit plans.

Rhonda Skiles

Rhonda F. Skiles Tax Partner, CPA

Rhonda is a Partner at our firm and has 25 years of experience in public and private accounting. She works extensively within the affordable housing industry advising management companies, owners and developers. In addition to overseeing tax filings to ensure compliance with various taxing authorities, she is responsible for identifying and resolving the complex […]