Cafeteria Plan Relief in Response to COVID-19

Client Alerts COVID-19 Resources Employee Benefits & Executive Compensation

Treasury and the IRS released two Notices (2020-29 and 2020-33) on May 12th which provide several types of relief to participants under cafeteria plans in response to the COVID-19 pandemic.

Under existing cafeteria plan rules, participants who have elected to pay for their medical and other insurance coverage with pre-tax dollars and/or are making pre-tax contributions to a health flexible spending account (FSA) or dependent day care FSA cannot make changes in those elections during the plan year except in very limited situations.

The Notices allow (but do not require) employers to amend their cafeteria plans to give employees additional flexibility with respect to the elections they made before the pandemic hit.

Mid-Year Election Changes – Notice 2020-29 provides that a cafeteria plan may permit an employee to make the following mid-year election changes during 2020:

  • Enroll in health plan coverage which the employee initially declined.
  • Change the level of health coverage in which the employee is enrolled (such as employee-only to family).
  • Drop the employer’s health coverage, but only if the employee attests that he or she will enroll in other health coverage not sponsored by the employer (such as a spouse’s health plan or individual Marketplace coverage or Medicare). The employer can rely upon that attestation as long as it does not have a reason to believe it is untrue.
  • Enroll in a health FSA or increase or decrease existing health FSA elections.
  • Enroll in a dependent care FSA or increase or decrease existing dependent care FSA elections.

Note that the changes can only be made prospectively; the plan must be amended to reflect the changes no later than December 31, 2021; the relaxed rules only apply for the 2020 calendar year; and the changes must be communicated to the employees.

Best practice:  Employers who want to give employees ability to make changes in their health plan coverage should discuss the change with their health plan insurer or stop-loss carrier in the case of a self-insured plan. In addition, employers should consider limiting any decrease in a health FSA election to be no less than the amount that has already been reimbursed by the plan.

Extended Claim Periods for FSAs – Under long-standing IRS rules, health and dependent care FSA amounts that had not been used to reimburse eligible expenses by the end of a plan year were forfeited. However, these plans have been permitted to add a “grace period” of up to 2 ½ months in the new plan year during which additional expenses can be incurred and applied against the unused amounts from the prior plan year (giving a participant an opportunity to reduce or eliminate forfeiture of unused amounts).

Notice 2020-29 permits any FSA with a plan year or grace period ending in 2020 to give participants until December 31, 2020 to incur additional expenses and apply them against unused amounts from the prior plan year. This will benefit non-calendar year plans and calendar year plans with a grace period. For example, a calendar year plan with a grace period ending March 15, 2020 could be amended to allow participants with unused amounts as of March 15th to incur expenses until December 31, 2020 and be reimbursed for those expenses out of the unused amounts (which would otherwise be forfeited).

Note:  An employee who has unused amounts remaining in his or her health FSA at the end of a plan year or grace period ending in 2020, and who is allowed an extended period to incur expenses under a health FSA per Notice 2020-29, will not be eligible to contribute to an HSA during that extended period, except in the case of an HSA-compatible health FSA.

A health FSA has been able to adopt a carryover provision that allows up to $500 of unused amounts to be carried over into the next plan year to be used to reimburse expenses incurred in that later plan year. The extended “grace period” to December 31, 2020 for incurring claims is available to a health FSA with a carryover provision even though the IRS normally prohibits such a plan from having a grace period.

Increase in Health FSA Carryovers – Notice 2020-33 adds a permanent way to adjust the carryover amount mentioned above for inflation, with the first adjustment being $550 for the 2020 plan year for amounts carried over into 2021 (20% of the maximum health FSA salary reduction contribution for the plan year).

Plan Amendments – Plans must be amended to adopt the relief provisions described above no later than December 31, 2021, and those provisions must be communicated to the participants (although the Notice does not specify the timing or form of the communication).

Clarifications – Notice 2020-29 makes it clear that the testing and treatment for COVID-19, which must be covered with no sharing (pursuant to the Families First Coronavirus Response Act (FFCRA) and the CARES Act), include the panel of diagnostic testing for influenza A&B, norovirus, and other coronaviruses and respiratory syncytial (RSV).

The CARES Act provides a safe harbor that allows HSA eligible High Deductible Health Plans (HDHPs) to cover telehealth and other remote care services without a deductible (or with a deductible lower than otherwise required). Notice 2020-29 clarifies that this safe harbor applies to services provided on or after January 1, 2020 and applies for plan years beginning on or before December 31, 2021.

If you have any questions, feel free to call (919-781-4000) or e-mail your Wyrick Robbins contact or Gray Hutchison ( or San Parikh ( of our Employee Benefits & Executive Compensation Practice Group.

NOTICE:  This Alert provides merely an overview and summary information regarding IRS Notices 2020-29 and 2020-33 and is not written advice directed at the particular facts and circumstances of any person or company. Please note that not all potential details and nuances regarding these requirements and changes to law have been addressedand this Alert does not involve analysis of specific facts concerning any specific company or reach any conclusion regarding any specific individual or company. If you are interested in the subject of this Alert, we encourage you to contact us or your legal counsel to discuss the potential application to your situation.