Coronavirus pandemic prompts liberalization of cafeteria plans, FSAs, and dependent care reimbursement plans

The coronavirus pandemic has affected employers and the benefit plans they provide to their employees in a drastic manner. We have discussed the impact on retirement programs in a series of articles and a webinar

In addition to retirement plans, there have also been added pressures on the various other benefit programs sponsored by employers that provide health care benefits and dependent care reimbursement. Due to a combination of layoffs, changes in availability of and costs for childcare, unanticipated medical bills, delays in scheduled medical procedures and reductions in pay, employees find themselves needing to rethink decisions they made prior to the coronavirus shutdown.

In two recently released notices and changes made by the Coronavirus Aid Relief and Economic Security Act (CARES Act), some of the rules regarding cafeteria plans, flexible spending accounts (FSAs) and dependent care reimbursement plans have been relaxed. Most of these changes are not required. Employers can choose to implement them or not. If implemented, they will require notifying employees and making plan amendments.

Mid-year election changes

One of the central requirements for Section 125 or cafeteria plans is that a participant makes an election prior to the beginning of the plan year regarding the benefits he or she is choosing. Once made, the election is irrevocable for that year unless the participant incurs a “change in status.” Change in status includes events such as marriage, divorce, having a baby, adopting a child, losing a job, reduction in hours, and/or increases in premium expenses and other similar major events.

The elections made by participants typically include an election to enroll or not to enroll in the health plan sponsored by the employer. If enrolling, the election would involve whether the coverage is single or family and which health program the employer offers if it offers choices. Likewise, with respect to FSAs and dependent care reimbursement plans, the decision is whether to enroll or not and if enrolling how much to defer from one’s compensation and have credited to the FSA or dependent care reimbursement account.

In Notice 2020-29, the IRS authorizes cafeteria plans to permit mid-year election changes to be made by participants regardless of whether the participant has incurred a qualifying change in status. All mid-year changes are prospective only.

Specifically, with respect to health care plans:

  • A participant who previously declined employer health care can make an election to enroll.
  • A participant who previously elected a particular type of coverage such as single can change his or her election to enroll in a different type of coverage such as family.
  • A participant who elected one health option can elect to enroll in a different option.
  • A participant who elected to be enrolled in the employer health plan can elect to drop coverage but only if he or she attests in writing that he or she will be enrolling in another health care program.

With respect to FSAs and/or dependent care reimbursement plans:

  • A participant can make an election to enroll, drop out, or increase or decrease the amount in the reimbursement account.

Once again, these changes are not required. An employer can choose to implement some, all, or none of these. The changes are prospective only. Employers concerned about adverse selection on health care elections may limit the permitted changes to changes increasing coverage; for instance, from single to family or from a low option plan to a plan with greater coverage. If an employer’s health plan is fully insured, the employer is best advised to consult with the health insurance carrier before implementing any changes to be sure that the carrier can and will accommodate such election changes.

Again, if an employer chooses to implement any of the options herein, the plan will need to be amended and participants are to be notified. While the actual plan amendment is not required until December 31, 2021.

Use-it-or-lose-it requirement modified

With respect to FSAs, the cafeteria plan rules require that amounts credited to FSAs must be used by the end of a set period or forfeited. Over the years, the harshness of this "use-it-or-lose-it" rule has been moderated by either allowing claims during grace periods to be reimbursed or by allowing a carryover of a low dollar amount into the following year.

Under Notice 2020-29, the IRS is permitting employers to modify their FSAs to reimburse expenses incurred before December 31, 2020 from funds that would have been forfeited at the expiration of a grace period expiring in 2020. For example, if the FSA is a calendar year plan and permits a 2½ month grace period which would have expired March 15, 2020, and the participant has funds as of March 15, 2020 that would have been forfeited, the employer could elect to allow participants to use those funds to reimburse 2020 medical expenses.

Once again, this is not required and is only an option for employers. If the employer chooses to add it, the plan will need to be amended by December 31, 2021.

In addition, some FSAs have been designed to permit a carryover of up to $500 of unused funds into the next plan year. Notice 2020-30 revises the rule to adjust the carryover amount for inflation. For 2020, the maximum FSA amount is $2,750. The maximum carryover will be 20% of that amount and will change as the FSA limit changes. The carryover limit then for 2020 will be $550. This means up to $550 of FSA amounts may be carried over into 2021.

Additional reimbursable items

When the Affordable Care Act was enacted it changed the rules regarding whether non-prescription drugs could be reimbursed in a tax-free manner. Previously, a participant could be reimbursed for such over the counter drugs. The Affordable Care Act required that only drugs that were the subject of a prescription could be reimbursed in a tax-free manner. Now, the CARES Act changes that rule back to what it was previously. Effective retroactively to January 1, 2020, non-prescription drugs are now reimbursable on a tax-free basis.

In addition, the CARES Act added menstrual products to the list of items that may be reimbursed tax-free.

Unlike the other changes discussed here, the revisions to the reimbursable items have been accomplished by changing definitions in the Tax Code. Plans that incorporate those definitions include the expanded list of reimbursable items without a need to amend. If a plan does not simply incorporate the Tax Code definitions it may be necessary to amend the plan to include the expanded list.


Dealing with the ever-changing workplace environment due to the coronavirus pandemic is challenging to say the least. The changes discussed in this Alert are focused on trying to mitigate the impact of the economic disruptions affecting employees as they navigate their various benefit programs.

Employers will need to make decisions based on the specifics of their own workforces and how much administrative disruption they are willing to tolerate in deciding which, if any, of these liberalized rules they wish to implement.

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