Through the COVID-19 pandemic, America has seen changes to some retirement and health plan benefit provisions, since the Internal Revenue Service (IRS) has relaxed certain restrictions to provide relief to taxpayers. One area of focus has been to provide temporary flexibility for Section 125 cafeteria plans and high-deductible health plans. The change in Section 125 cafeteria plans aims to help taxpayers with unexpected expenses, like health care and dependent care, that arise due to or during the COVID-19 pandemic.
Internal Revenue Code Section 125 enables employees to take certain employer-sponsored benefits that are typically taxable and convert them into nontaxable benefits. Under cafeteria plans covered by Section 125, employees can typically choose from various options for these qualified benefits. Examples include accident and health benefits, dependent care assistance, group term insurance, and health flexible spending arrangements (FSAs).
These elections allow employees to revoke coverage options made during the open enrollment period and make new elections. If an employee originally decided to decline their employer-sponsored health coverage, the Section 125 cafeteria plan will permit that employee to elect into the coverage. Employees can also make similar changes to their prior elections for health FSAs and dependent care assistance programs. In addition to revoking or electing into FSAs and similar programs, employees can now elect to increase or decrease the election regarding how much they fund the plan.
Generally, health FSAs and dependent care assistance programs have dollar amount limits that can either be carried into the next year or have a grace period to be used, but not both. If the adopted Section 125 cafeteria plan elects to have a grace period, an employee has two months and fifteen days directly following the plan year-end to use any unused amounts for the plan year. The new IRS rules allow an employer to also amend their Section 125 cafeteria plans to extend the grace period for a 2019 plan to December 31, 2020. Additionally, the health FSA carryover for plan years beginning in 2020 has been increased from $500 for 2019 plans to $550 for 2020 plans.
If you or your organization has any questions or if you need additional guidance relating to the COVID-19 IRS regulations or Section 125 cafeteria plans specifically, please feel free to contact Schneider Downs.
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Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax, or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice.