FAQs on mid-year election changes
In response to the COVID-19 pandemic, the IRS recently issued guidance relaxing election changes for health plans offered under a Section 125 plan, including health FSAs and dependent care FSAs. The guidance also provides more options for unused health FSA and dependent care FSA amounts.
Below are a few FAQs related to this guidance:
FAQ: The Section 125 changes that were announced recently were much anticipated. Can you give us a high level overview of the changes and how they impact plan participants?
This guidance from the IRS basically gives employers who allow pre-tax premium payments through what we call a “Section 125 cafeteria” plan, the green light to allow employees to make midyear changes.
Normally, employees are locked into their annual elections after OE unless they experience a qualifying life event (like a spouse loses other coverage, marriage, birth, change in employment status, etc.).
The problem with this pandemic is that the normal rules in place didn’t really allow for someone to make midyear changes for what was going on right now.
Normally, those types of changes aren’t allowed because they can cause what we call ‘adverse selection’ and can frankly be administratively burdensome.
Some of the insurance companies were allowing changes, but that didn’t mean the IRS was necessarily allowing it. Remember, the IRS is concerned with tax revenue, and these rules say that since we’re letting you shelter all of this money from taxable income, then you have to play by our rules. We weren’t really sure until now. So, now we know with certainty that the IRS will permit expanded midyear changes and the parameters around the relaxation.
At a high level, employees can now:
make a brand new election if they previously waived during OE or as a new hire
can change plans or change coverage tier (like move from self-only to family, change to the copay plan from the HDHP, drop/add dependents, etc.)
completely drop coverage, but the EE has to attest to the fact that they will be enrolling in other comprehensive medical coverage elsewhere (exchange or another employer’s plan). There’s a sample given on page 8 of the IRS notice.
can drop, add, increase or decrease their FSA or DCFSA election on a prospective basis!
FAQ: Since health, dental, vision, FSA, and DCA plans are all under Section 125, can an employer choose to amend just their FSA and DCA plans and not their health plan?
Yes, this is important. Employers can decide for themselves if this is something they want to allow. They are NOT required to allow these midyear changes. And if they want to allow some but not all, they have the flexibility to do so. For example, if you want to permit changes to the FSA or Dependent Care FSA, but not allow midyear changes to the medical or dental elections, then that is allowed.
However, the normal timelines for notification of special enrollments were recently paused in another set of regulations. In other words, if someone experiences a special enrollment right when there’s a birth, adoption, marriage or loss of other coverage, then normally the employee has 30 or sometimes 60 days to notify the employer. RIght now, that deadline for notifying the employer is paused until after the outbreak period, which means employees can make these changes past the normal deadlines.
FAQ: Is it possible for an employer to allow mid-year changes to a dental or vision plan, or does it only apply to health, FSA, and DCA?
Yes, the section 125 rules apply to any benefit that’s allowed to be paid on a pre-tax basis through a cafeteria plan. As a reminder, "cafeteria plans" refer to those that allow pre-tax benefits, or salary reductions that are not taxable, and require a POP document. So, under this guidance, the employer can choose to allow changes under just the medical and dental, and not the health FSA or Dep Care FSA or the other way around.
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