Many of the COVID-19 relief provisions included in the Families First Coronavirus Response Act (FFCRA), the Coronavirus Aid, Relief, Economic Security Act (CARES), and Internal Revenue Service (IRS) Notice 2020-29 were set to expire at the end of the 2020 calendar year. As infection rates continued to soar into the holiday season, employers and group health plan sponsors were left with no direction or guidance on how to organize their benefit offerings for the 2021 calendar year. This was especially troublesome for employers that sponsor benefits via a cafeteria plan, such as Health Care Flexible Spending Accounts (FSAs) and Dependent Care Assistance Programs (DCAP).
After months of waiting for IRS guidance after the initial COVID-19 outbreak, IRS Notice 2020-29 was released by the agency in May 2020, included guidance that essentially allowed cafeteria plans to be amended to allow for unprecedented relief for plan participants. This guidance, however, contained a strict expiration date of December 31, 2020. Just as the sun was beginning to set on these provisions, and plan sponsors sat impatiently waiting for additional guidance, the Consolidated Appropriations Act (the “Act’”) was signed into law on December 27, 2020. The Act, however, partially extended most of the relief allowances set forth under IRS Notice 2020-29, and added new ones that cafeteria plan sponsors of which cafeteria plan sponsors should be aware.
As background, IRS Notice 2020-29 provided for increased flexibility with respect to mid-year elections under an Internal Revenue Code (IRC) Section 125 cafeteria plan during calendar year 2020 as it related to employer-sponsored health coverage, FSAs and DCAPs offered through a cafeteria plan. Traditionally, elections regarding qualified benefits under a cafeteria plan were generally irrevocable for the duration of the plan year absent a midyear election event authorized by IRC Section 125 and adopted by the plan document.
IRS Notice 2020-29 totally defied the general rule and provided temporary flexibility for cafeteria plans to permit employees to make certain prospective mid-year election changes for employer-sponsored health coverage, FSA, and DCAP elections during calendar year 2020 without the occurrence of midyear election events. The notice also provided increased flexibility with respect to plan years ending in 2020 and grace periods to apply unused amounts remaining in FSAs and DCAPs to eligible incurred through December 31, 2020.
The Consolidated Appropriations Act of 2021 picks up where IRS Notice 2020-29 left off, by including similar provisions, with notable changes to some, and extended certain relief provisions into 2022. Unlike IRS Notice 2020-29, there is no language in the Act that continues to permit plan sponsors to allow for increased flexibility with respect to mid-year elections as it relates to employer-sponsored health coverage.
As there was a lot of pushback from insurance carriers on this specific item, as it essentially allowed plan sponsors to hold an open enrollment free-for-all when it came to major medical coverage, it is no surprise this specific provision did not make its way into the Act. The Act, however, does permit FSA and DCAPS to continue to allow prospective elections during 2021 without regard to IRC Section 125 midyear election events. The Act also permits FSAs and DCAPs to continue to allow any remaining balances at the end of plan years ending in 2020 and 2021 to roll over into the following plan year as well as extend grace periods for up to 12 months.
The Act also provided some new relief provisions that were not included in IRS Notice 2020-29. For example, FSAs are now permitted to allow employees who termination participation in the plan during 2020 or 2021 to spend unspent balances through the end of the plan year, without electing COBRA FSA. Finally, for DCAPs, the Act allows for a temporary increase in the maximum dependent care age of 13 to age 15. This means that an employee may be reimbursed for dependent care expenses of their eligible 14 year old during 2020. Further, if such employee has an unused balance as of the end of 2020, the same rule can be applied to 2021, but only with respect to the unused balance that is carried forward into 2021 from 2020.
It is also important to note that similar to IRS Notice 2020-29, all relief provisions detailed in the Act are optional, and are not requirements, for cafeteria plan sponsors. In order for any of the above relief provisions to be applicable to a cafeteria plan, the plan document would need to be amended to allow for such changes. As such, if cafeteria plans were amended in response to IRS Notice 2020-29, it may be a good idea to revisit and update those amendments to be consistent with the Act. As IRS Notice 2020-29 has expired, the Act should be the only source for cafeteria plan relief provisions beyond December 31, 2020.