May 15, 2020

IRS Offers Greater Flexibility for Section 125 Cafeteria Plans in Response to COVID-19 Pandemic

Holland & Knight Alert
Victoria H. Zerjav


  • The Internal Revenue Service (IRS) issued guidance to allow companies to provide greater flexibility for employees participating in Section 125 cafeteria plans to account for changes in their medical and dependent care needs arising from the COVID-19 pandemic.
  • The new guidelines permit employers to amend their cafeteria plan documents to extend certain claims periods, increase the limit on carryover amounts for health flexible spending arrangement (FSAs) and to allow employees to change their benefit elections with respect to employer-sponsored health coverage, health FSAs and dependent care assistance programs (DCAPs).
  • Employers sponsoring cafeteria plans may amend plans to reflect one or more of the changes permitted under the new IRS rules effective on or before Dec. 31, 2021, and retroactive to Jan. 1, 2020.

The Internal Revenue Service (IRS) issued Notice 2020-29 and Notice 2020-33 on May 12, 2020, to provide relief from the COVID-19 pandemic (COVID-19) for taxpayers participating in Section 125 cafeteria plans. The provisions are temporary and are intended to help employees accommodate changes in their medical insurance coverage or dependent care needs and healthcare expenses resulting from unanticipated events such as the cancellation of planned medical procedures, closure of schools and changes to work locations.

Increased Election Opportunities

A cafeteria plan is maintained by an employer and allows employees to pay for certain qualified medical or dependent care expenses on a pretax basis. Generally, employees must make benefit elections prior to the first day of the plan year and may only revise their elections under a limited set of circumstances. Pursuant to Notice 2020-29, employers may now offer employees an opportunity to make the following election changes on a prospective basis (for both salary deferral purposes and enrollment in medical plans):

    • Enroll in employer provided health coverage midyear for those employees who previously declined coverage
    • Enroll in a different health coverage option offered by the same employer
    • Drop existing employer-sponsored health coverage (and provide employee attestation of alternate coverage)
    • Make midyear changes to health FSA or DCAP elections

Relief for High-Deductible Health Plans and Health Savings Accounts

Notice 2020-29 confirms that now required specified diagnostic testing coverage provided at no cost to participants under Notice 2020-15, including in high deductible health plans (HDHPs), will not put HDHP status at risk even when covered prior to the deductible being met. The notice also states that providing telehealth and other remote care services, typically categorized as other health plan coverage in addition to an HDHP, will not prohibit an employee from contributing to a health savings account (HSA) while the special rules are in effect (from Jan. 1, 3030 through Dec. 31, 2021).

Extended Claims Periods & Increased Health FSA Carryover Limit

Notice 2020-29 also extends the period during which employees may incur expenses under the health FSA or DCAP from the end of a grace period ending in 2020 or a plan year ending in 2020 to December 31, 2020. In addition, Notice 2020-33 increases the limit on the amount subject to which unused amounts in a health FSA may be carried over between years. The maximum carryover amount from plan year 2020 that may be carried over to the immediately following plan year beginning in 2021 is 20 percent of the maximum salary reduction contribution, currently $550. 

Changes to Insurance Premiums

Notice 2020-33 further clarifies that, as a matter of administrative convenience, an individual coverage health reimbursement arrangement (HRA) and a premium reimbursement plan may treat health insurance coverage as incurred on (a) the first day of each month of coverage on a pro rata basis, (b) the first day of the coverage period or (c) the date the premium is paid. The plan document should be clear as to whether such an expense may be reimbursed.

Plan Amendment Timing

Plan amendments pursuant to Notice 2020-29 and Notice 2020-33 must be adopted on or before Dec. 31, 2021, and may be effective retroactively to Jan. 1, 2020. Employers should exercise caution before implementing these changes, however, to avoid unexpected consequences for both employer and employees.

If you have any questions regarding the IRS guidelines for cafeteria plans, please contact the authors or another member of Holland & Knight's Employee Benefits and Executive Compensation Group, including Partners Bob Friedman, Ari Alvarez, Kelly Bley, Kerry Halpern, John Martini, David Pardys and Rachel Shim.

Related Insights