COVID-19 Flexibility for Section 125 Cafeteria Plans and High-Deductible Health Plans

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).

The IRS recently issued notices (Notices 2020-29, 2020-33, and IR-2020-95) that allow for temporary flexibility of Section 125 cafeteria plans. Employers can amend their Section 125 plans to allow mid-year election changes and a grace period to apply unused health FSA amounts. An Amendment to Section 125 allows for some plan elections made by employees on or before December 31, 2021 to be retroactive back to January 1, 2020.

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.

You’ve heard our thoughts… We’d like to hear yours

The Schneider Downs Our Thoughts On blog exists to create a dialogue on issues that are important to organizations and individuals. While we enjoy sharing our ideas and insights, we’re especially interested in what you may have to say. If you have a question or a comment about this article – or any article from the Our Thoughts On blog – we hope you’ll share it with us. After all, a dialogue is an exchange of ideas, and we’d like to hear from you. Email us at [email protected].

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.

© 2022 Schneider Downs. All rights-reserved. All content on this site is property of Schneider Downs unless otherwise noted and should not be used without written permission.

our thoughts on
A Sigh of Relief for Beneficiary IRA Owners
The Latest on the CommonSpirit Health Ransomware Attack
Illumina Cybersecurity Vulnerability Advisory Issued to Healthcare Providers
Lincoln College Closes Due to Ransomware Attack
Don’t Ignore an IRS 5071C letter!
Is There Additional COVID-19 Relief Incoming?
Register to receive our weekly newsletter with our most recent columns and insights.
Have a question? Ask us!

We’d love to hear from you. Drop us a note, and we’ll respond to you as quickly as possible.

Ask us
contact us

This site uses cookies to ensure that we give you the best user experience. Cookies assist in navigation, analyzing traffic and in our marketing efforts as described in our Privacy Policy.