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IRS Relaxes Some Section 125 rules, HSA/HRA and FSA Plans

Normally, Section 125 plan elections are permanent for the plan year.  However, due to COVID-19 some of the rules have been relaxed and do not require a qualifying event.

The IRS recently published Notice 2020-29 relaxing some of the rules for mid-year election changes for certain Section 125 plans.  These rules apply to plans ending in calendar year 2020 and may require a plan amendment.  The amendment must be completed by December 31, 2021; however, the changes can be implemented immediately.  This flexibility, if elected by the employer, allows employees to:

  • Change coverage options previously elected during open enrollment (if the carrier allows)
  • Drop coverage for covered family members or themselves if they will be replacing coverage for the impacted individual immediately with other coverage (requires attestation)
  • Make an election to add, change or drop a Health FSA election
  • Make an election to add, change or drop a Dependent Care Assistance Program election

Note, these plan changes are discretionary by the employer and do not have to be implemented.  Check with your advisor to see if your changes require a plan document amendment.

The IRS also released Notice 2020-33 that permanently increases the amount of unused FSA funds an employee can carry over from one year to the next.  The maximum carry over amount prior to the IRS notice was $500.  The employer now has the option of amending the FSA plan to allow the carry over maximum to continue at 20% of the maximum eligible contribution, which is $2,750 for calendar year 2020 (20% of $2,750 is $550).  Or the $550 carry over amount can be permanently fixed at that level each year.  The employer can also choose to not allow a carryover from one year to the next.  If your plan currently does not allow carryover, and you do not want to add this option, no action is needed.

Although this is not included in these changes, there are two additional options that can be implemented to deal with end-of-the-year funds.

  • Your plan is allowed to have a runout period during which a participant can file for reimbursement for expenses that were incurred during the plan year
  • Your plan is allowed to have a grace period of up to 2.5 months during which a participant can file against unused plan year funds for expenses incurred after the end of the plan year.
  • NOTE:  A plan cannot have both a grace period and a carryover.

Since the implementation of the Affordable Care Act in 2010, most over-the-counter items have not been eligible expenses for reimbursement under HSA, HRA and Health FSA plans. 

However, the recently implemented CARES Act contains a permanent provision that allows these funds to be used for over-the-counter medical products, including menstrual care products.  These expenses will be reimbursable if purchased on or after January 1, 2020 and will, in most cases, require an amendment to your plan.

The employer must amend the FSA, and HRA to implement any or all of the changes noted in the document; however, they can be implemented immediately, and the employer has until December 31, 2021 to amend the plan.

The E2E Benefits team of experts is here to help you with urgency and compassion. Let us know your questions. 

This information being shared has been summarized by our office from various reliable sources. Please do not view this information as individual tax advice or recommendations from E2E. This is an overview of the changes to tax regulation. If you decide to utilize any of the information, please contact E2E or speak with your tax advisor.