Can You Change Fsa Contributions Mid Year

updated Jan. 4, 2021

The article below was last updated on June 10, 2020

Onorthward May 12, the IRS released two notices allowing employees during 2020 to brand changes to their enrollments in employer-sponsored health plans and to suit pretax contributions to health flexible spending accounts (health FSAs) and dependent care flexible spending accounts (dependent intendance FSAs).

• Discover 2020-29 provides increased flexibility for participants to make midyear health plan, health FSA and dependent care FSA ballot changes.
  

• Notice 2020-33 increases the carryover limit permitted for health FSAs.
  

These changes, which use just to plan twelvemonth 2020, had been advocated past the Society for Human Resource Management (SHRM). The new guidance is permissive; employers are not required to make these plan changes.

Health Plan Enrollments and Elections

In IRS Notice 2020-29, the agency said it would let increased flexibility regarding midyear election changes for group health plans and FSAs. Employers, at their discretion, may allow employees to make either or both of these changes:

• Enroll in employer-sponsored health plans during the plan year by making a new election. Employees may practise and so even if they had previously declined enrollment.
  

• Switch wellness plans or tiers within plans. Employees will be able to drib current coverage to enroll in dissimilar coverage offered by the aforementioned employer or modify from single coverage to family coverage, for instance.

"The IRS discover says that employers are not required to provide unlimited changes and the employer can set a timeframe to make changes," said Chatrane Birbal, vice president, public policy, at SHRM.

Although allowing employees to make these newly permitted plan changes during 2020 is optional for employers, many "will want to enable employees to enroll or revoke an enrollment election in diverse grouping health plan options," noted Gary Kushner, president and CEO of 60 minutes and benefits consulting house Kushner & Visitor in Portage, Mich.

Difficult Times

While under existing Section 125 cafeteria plan rules a change in the employment status of a spouse would exist a life event that allows a midyear election change, the new guidance does non require that employees provide documentation of this, or that a requested election change be consequent with any change-in-status event.

Julie Stone, North America co-leader for the health management do at Hr consultancy Willis Towers Watson, noted that "from an enrollment/plan election perspective, I wait there are many people where both partners/spouses were employed and opted to exist covered nether i programme potentially with children. If that parent loses employment, the toll of family COBRA is likely to be much more costly than changing to the working spouse/parent'south employer sponsored plan."

She added, "Given the unemployment and furlough rates, I think this is i of the almost important aspects of the new guidance."

David Speier, managing managing director for benefits accounts at Willis Towers Watson, said that assuasive midyear program elections could mean that employees will "switch to a plan that increases the employer's financial brunt during a difficult time," for instance if employees opt for a low-deductible plan with higher premiums paid by the employer, or shift from single coverage to a more expensive family unit programme. However, other midyear changes could reduce an employer's cost sharing, "as when employees elected a dental plan but now opt out because they tin't utilize it this yr," Speier added.

FSA Enrollments and Elections

For both wellness FSAs and dependent intendance FSAs (used to fund caregiving expenses with pretax dollars), employers tin permit employees enroll, drop coverage, and increase (within the annual limit) or decrease payroll-deducted contributions during 2020.

"This is welcome relief, and many employers will consider providing it nether their plans," said William Sweetnam, legislative and technical director at the Employers Quango on Flexible Bounty, which represents sponsors of account-based benefit plans.

Stone explained, "At a time where some people may be cash-strapped, deferring elective procedures, new eyeglasses, etc., may well make sense, then existence able to suspend contributions to a wellness FSA or limited purpose dental/vision FSA is important."

Kushner blogged, "Many employers would encompass enabling dependent care FSA participants to increase (or more than likely subtract or revoke) their elections if schools and day care centers are airtight, or if the employee is working from home."

Nonetheless, for whatsoever FSA, "employers may be more reluctant to enable employees to decrease or revoke their election if they've already claimed their previous total ballot amount and payments take been disbursed," he added.

In 2020, employees tin contribute $2,750 to a health FSA, including to a limited-purpose FSA restricted to dental and vision intendance services, which can be used in tandem with a health savings business relationship (HSA).

The dependent care FSA maximum, which is set past statute and not adjusted annually for inflation, is $five,000 a twelvemonth for individuals or married couples filing jointly, or $ii,500 for a married person filing separately, subject to earned income limits.

[SHRM members-simply forms: COVID-19 Midyear Ballot Change Attestation]

FSA Use-It-or-Lose-It Rules

Existing IRS rules provide an employer 2 options for unused health care FSA funds: A grace flow into the new year during which employees tin continue to spend FSA funds from the previous yr, and the power to carryover over a limited amount of funds from the previous year. Employers tin can choose to incorporate either the grace menstruum or the carryover feature, or neither, simply not both.

The new guidance changes the rules for both these provisions for programme year 2020.

Grace Period Extension

IRS rules allow employers to add a two-and-one-one-half-month grace period immediately following the end of each FSA plan year, during which health FSA holders could spend whatever funds remaining in the account. For calendar year health FSAs, the grace menses ends March fifteen. The new guidance will extend the grace period to the finish of 2020.

For plan years catastrophe before Dec. 31, 2020, employers can amend a health or dependent care FSA plan to permit participants to "spend down" through twelvemonth-end 2020 any remaining amounts from 2019 that would otherwise be forfeited. Employers tin allow claims incurred at any time in 2020 to be applied to whatsoever remaining 2019 FSA balances.

Plan amendments that extend the claims period for health and dependent care FSAs may be effective retroactively to Jan. 1, 2020. All eligible employees should be informed of the changes.

Increased Carryover Cap

IRS Notice 2020-33, also released May 12, increases the amount of funds that health FSA participants tin can behave over without penalty at the stop of the year for plans that use the carryover pick. The carryover amount will now be indexed for inflation by making it 20 percent of the commanded payroll-deductible contribution limit, which is $2,750 for programme year 2020.

Every bit a result, the maximum unused amount from a plan twelvemonth starting in 2020 immune to be carried over to the immediately following plan year get-go in 2021 is $550, upwardly from the previous limit of $500.

[SHRM members-only HR Q&As: What options does an employer have with unused FSA funds? ]

While Sweetnam chosen the aggrandizement aligning helpful, he noted that many take advocated allowing much larger carryover amounts or eliminating the use-it-or-lose-it rule completely. "I recollect that the limited amount of the increase ways that the IRS and Treasury Section were concerned that they did not have the authority under the Internal Revenue Code to provide for a larger carryover amount," he suggested.

Notice 2020-33 also antiseptic that the previously provided temporary relief for high-deductible health plans (permitting them to cover COVID-19 related services at no cost) may be applied retroactively to Jan. 1, 2020.

Different Plans Had Dissimilar Rules

Some midyear elective-contribution changes have long been permitted. For instance, changes to payroll deductions to fund 401(thousand) or similar defined contribution retirement plans, HSAs, and commuter do good plans can be made at any time for any reason, although employers may limit changes for administrative purposes, such as to once per month.

For employer-sponsored grouping wellness, dental and vision plans, however, changes are restricted. Under tax lawmaking Department 125, elective contributions typically tin can be inverse simply within 30 days of a qualifying result as determined past the IRS, such as spousal relationship, divorce, job change, birth or adoption of a child, or when a dependent child reaches age 26. The new guidance carves out an exception for changes made during 2020 due to the COVID-19 pandemic.

HSA-Eligibility Bug

Sweetnam noted an issue with the new guidance that could complicate matters for employees who had a 2019 health FSA and were newly enrolled in an HSA in 2020: An employer that carries over unused funds from a prior yr to a current twelvemonth under a full general-purpose health FSA volition not be eligible for HSA contributions for the unabridged current plan year.

"Carryover 2019 FSA amounts can be used to pay for wellness care expenses below the deductible in 2020, thus making participants [with both carryover health FSAs and new HSAs] ineligible to make HSA contributions in 2020," Sweetnam said. "Consequently, employers may want to consider the impact on HSAs as they make up one's mind whether to extend the claims period for health FSAs."

To avoid this effect, employers tin permit 2019 carryover wellness FSA funds to be transferred an HSA-compatible, limited-purpose FSA, which tin can be used only for vision care and dental expenses.

SHRM Advocacy

"As employers and their employees navigate the current crunch, workplace wellness care has emerged equally a disquisitional issue requiring flexibility," Emily M. Dickens, SHRM corporate secretary, chief of staff and head of government diplomacy, wrote in an Apr sixteen letter to IRS Commissioner Charles Rettig.

SHRM advocated flexibility on rollover provisions, fourth dimension frames for claims, and midyear ballot changes to FSAs due to employees' evolving health care and child care needs as a result of COVID-nineteen.

SHRM also requested a one-time, pandemic-related window for employees who may accept declined coverage at the start of the agenda year to enroll in an employer's wellness plan, every bit the IRS is now assuasive for 2020. "Many employers are struggling with employee requests for ballot changes and whether such a modify would be permitted nether IRS guidance," Dickens wrote.

In addition, SHRM asked the IRS to increase the annual $500 carryover limit for health FSAs for plans that use the carryover choice.

"Many employees … carefully contemplated a wellness intendance FSA ballot based on [elective] medical procedures that will no longer occur," Dickens pointed out, and these employees should not exist penalized because their anticipated annual medical expense estimates need to be adapted.

Update:

Hour consultancy Mercer'south COVID-19 survey, with responses through June 9 from nearly 300 big U.Due south. employers, asked if they would "reopen" their health plans and FSAs for the 2020 plan yr to employees and their dependents, whether they currently participate or non, to make whatever type of midyear changes allowed by the IRS guidance.

Just under half (47 per centum) of the employers surveyed indicated they will allow some type of mid-year change, with the near pop being irresolute contributions to a dependent care FSA (43 percent) and irresolute contributions to health care FSA (29 percent).

Fewer employers are planning to allow changes to medical programme elections, such equally enrolling in a plan after having waived coverage or calculation a dependent. Nevertheless, approximately 1 in x say they will allow these types of changes.

Source: Mercer COVID-19 survey, U.S. results as of 6/9/2020 (279 respondents, more than one response allowed).

"Allowing participants to modify their contributions to dependent care or wellness FSAs can exist a relatively elementary way for employers to support employees coping with COVID-19 related problems," said Jay Savan, a partner in Mercer's health business. "Maybe a child'due south summer camp is closed, or someone cancelled some planned dental piece of work, or a spouse is out of work and the employee only needs more coin in their paycheck."

Savan said while there is very little downside in allowing dependent care FSA changes, employers should exist mindful that there are some potential risks associated with assuasive changes to wellness FSAs. These risks include firsthand employee access to full account limits during a time when employers are hyper-focused on conserving cash, as well as the potential for employees to accelerate their use of health FSA funds and exit the plan in a deficit if they discontinue employment.

"Permitting enrollment changes midyear in core medical plans, however, brings with it much greater take chances to the sponsor, such as incurring high cost claims and generally enabling adverse selection," Savan noted. "It tin also have collateral impact on stop-loss reinsurance and other related contracts."

He advised employers to weigh these risks earlier liberalizing the terms of midyear enrollment in medical plans in 2020.

Related SHRM Articles:

Appropriations Human action Permits Midyear FSA Elections, Unlimited Carry-over Amounts Through 2021, SHRM Online, Jan 2021

SHRM Asks IRS for Relief with Health Plan Compliance During Pandemic, SHRM Online, April 2020

Special COVID-19 Health Insurance Enrollment Windows and Waivers, SHRM Online, March 2020

2020 FSA Contribution Cap Rises to $ii,750, SHRM Online, Nov 2019

Source: https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/irs-allows-mid-year-enrollment-and-election-changes-for-health-plans-and-fsas-coronavirus.aspx

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