When employees made their 2020 benefits elections last fall, no one knew that a worldwide health crisis would unfold that would change people’s everyday lives.
Millions have already lost their job or have had their hours reduced. Others are working from home with school-age children sharing their space. Some have gotten sick and are facing healthcare costs. For many, money is tight and the future seems uncertain.
Benefits enrollment decisions are made with the best available knowledge and based on expectations related to health status and finances, along with current or anticipated caregiving responsibilities. However, as reality has turned upside-down and those assumptions and expectations changed radically, employees are asking if they can make changes to their benefits to address a new set of needs.
Rules associated with Sec. 125 cafeteria plans don’t allow employees to make mid-year changes unless they have a qualifying life event: they get married or divorced, they adopt or have a baby, they lose healthcare coverage under a spouse’s plan, for example.
But, these are extraordinary times, and to meet the perceived demand, the IRS recently issued guidance that enables employers to amend their healthcare and flexible spending account (FSA) plans to let employees make certain changes.
Note, we said enables, not requires. The guidance is just that. The IRS is indicating that employers may amend their plans to allow certain changes but there is no requirement to permit employees (or those on leave of absence, COBRA participants or retirees for that matter) to make any or all of the allowed changes.
The IRS guidance indicates changes can be allowed to healthcare plans and FSAs—both healthcare FSAs and dependent care FSAs. Here are the potential changes the plan sponsor can allow the employee to make:
- Healthcare plans. Employees can enroll if they previously declined coverage. They can change their current healthcare plan and enroll in a different plan. They can change their coverage level—add or drop dependents. And, finally, they can drop coverage if they attest to having other coverage elsewhere.
- Healthcare FSA. The employee can revoke their election. (In other words, they can stop contributing.) They can also increase or decrease their election amount. The 2020 maximum of $2,750 does not change.
- Dependent care FSA. The same as with the healthcare FSA, the employee can revoke their election. (In other words, they can stop contributing.) They can also increase or decrease their election amount. The 2020 maximum of $5,000 remains in effect.
This represents the universe of what’s allowed, but employers don’t have to offer the ability to make any changes, nor do they have to implement all of these types of changes. This is effectively an à la carte menu and the employer can decide which changes to serve up, if any.
For example, an employer may decide they won’t allow any healthcare plan or healthcare FSA changes but will allow employees to stop or decrease their dependent care FSA contributions.
Any allowed changes will be prospective. There is no specific time frame required by the IRS for employees to make changes—although it has to be during 2020--so the employer can define an enrollment period along with date the changes are effective. For example, the employer can allow employees to make changes from June 15 to June 26 with new elections effective on July 1.
If the employer decides not to allow any changes, no action is necessary. However, if any changes will be allowed, the plans will need to be amended along with plan documents. The employer has until the end of next year to make these updates but can move forward with employee changes as soon as practicable.
Because there is no requirement to allow mid-year changes, employers should pause and discuss their objectives with their vendors and partners. While the allowed changes may seem straightforward, when you begin to think through the details, the complexity becomes obvious. That’s why it’s particularly important to align with your benefits administrator, healthcare plan carriers and FSA vendor to talk through requirements, systems updates and timing before making any final decisions.
In issuing this guidance, IRS is giving employers latitude to allow employees to make certain benefits changes without a qualifying life event. However, it’s important to remember that guidance is not a requirement and whether or not to allow changes is something each plan sponsor should consider carefully.
If you have other questions, check out our Facebook live video discussion on Friday, May 22 I will go over FAQs on this ruling and answer any other questions from you.