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IRS Allowable Changes to Mid-Year Elections and Cafeteria Plans Amid Current State of Emergency

Due to the current national state of emergency, on May 12, 2020, the IRS released Notice 2020-29 and Notice 2020-33 which affect the administration of cafeteria plans. This includes:

· Cafeteria Plan Section 125

· Healthcare Flexible Spending Accounts (FSA)

· Dependent Care FSA

The IRS has allowed that under section 125 cafeteria plans employees can make mid-year election changes “with respect to employer-sponsored health coverage.” This includes:

· Making a new election if the employee initially declined enrollment on employer-sponsored health coverage

· Revoke an existing election and make a new election to enroll in different health coverage sponsored by the employer

· Revoke an existing election provided that the employee attests in writing that that the employee is enrolled or will immediately enroll in other coverage not sponsored by the employer

Note: Please check with your current carrier for additional guidance and allowance. Carriers do not have to allow these changes and will have their own rules.

If you choose to allow these changes, be aware of the administrative cost this may cause as an employer in communicating this to all your eligible employees, making the changes with the carriers, changing payroll deductions, etc. This change is optional and up to the employer to allow or not.

For both healthcare and dependent care FSA’s, employers can allow employees to make the following mid-year election changes:

· Revoke a previous election

· Make a new election

· Change a current election to either increase or reduce the amount (Important: only allow reduction in amounts to amount elected minus any spent to date amount)

Under the new guidance from the IRS Notice 2020-29, Employers may also allow employees to use funds from their 2019 plan year and elections to cover any expenses through December 31, 2020. This applies to both dependent and healthcare FSA’s. This applies to any plan with a grace period or plan year ending in 2020. This plan change is optional and up to the employer to offer.

Lastly, if your current FSA plan allows for rollover rather than a grace period, the carryover amount has been adjusted and will be indexed in step with the maximum salary reduction amount permitted each year. This means that instead of being able to carryover $500 from 2020 to 2021, employers will be allowed to allow employees to rollover up to $550. This is a mandatory change. Your Shepherd team will work with your FSA vendor to have the plan amended appropriately.

Please note, that to be able to make any of these changes accessible to your employees, your FSA plan documents will need to be amended. Please work with your account management team if you would like to make amendments to your plan. Shepherd & Associates does advise to proceed with caution when considering allowing employees to make any of these changes. You must consider the amounts already spent in FSA accounts and what it would mean to allow employees to make changes to elections mid-year. The deadline for amendments is December 31, 2020.

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Your Team at Shepherd & Associates

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