Elections in a Section 125 Plan Just Became Less Irrevocable During 2020

Just moments after hanging up the phone with a client confirming for them that there has been no relief under Section 125 on mid-year changes that are not HIPAA special enrollment events , the IRS issues Notice 2020-29 and Notice 2020-33 providing guidance that makes the advice I gave 5 minutes before invalid.   We are on the fastest freight train of guidance I have experienced during my career.   I point this out to remind you to pay attention to the dates of articles you are reading because if they are more than a few days old, the law may have changed.  Now on to the guidance…

Several weeks ago, the IRS and DOL issued a joint Final Rule extending a number of deadlines, including COBRA and HIPAA special enrollment deadlines.  As part of this relief, a group health plan is required to ignore the period of time from March 1st until 60 days following the end of the national emergency when calculating a participant’s special enrollment window or COBRA qualifying event notice.  However, the prior relief did not provide any guidance as it related to mid-year changes under a Section 125/Cafeteria plan.   Today the IRS issued a different type of relief for Section 125 plans.

As a reminder, elections under a Section 125 generally must be irrevocable and must be made prior to the first day of a plan year with limited exceptions outlined in the regulations.  The 125 regulations permit an employee to change an election in certain circumstances such as a change in status that results in a change in eligibility.   We have been receiving a lot of requests from plan sponsors wanting to allow mid-year changes in other circumstances as a result of the pandemic and wanting to know how to legally do it.   It sounds like the IRS was receiving those same requests.

The first of these two notices provides temporary flexibility during calendar year 2020 for plan sponsors to allow some additional mid-year changes that wouldn’t otherwise be permitted.   This guidance permits a plan sponsor to amend one or more of its Section 125 plans to:

  • Make a new election for employer-sponsored health coverage on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage;
  • Revoke an existing election for employer-sponsored health coverage and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis (including changing enrollment from self-only coverage to family coverage);
  • Revoke an existing election for employer-sponsored health coverage on a prospective basis, provided that the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer;
  • Revoke an election, make a new election, or decrease or increase an existing election regarding a health FSA on a prospective basis; and
  • Revoke an election, make a new election, or decrease or increase an existing election regarding a dependent care assistance program on a prospective basis.

All of these options only permit prospective changes.  To accept an employee’s dropping of health plan coverage, the plan sponsor must receive from the employee an attestation in writing that the employee is enrolled, or immediately will enroll, in other comprehensive health coverage not sponsored by the employer.  The plan sponsor is permitted to rely on the employee’s attestation and the Notice provides a sample attestation.

Unlike the Final Rule issued last month, this relief is COMPLETELY OPTIONAL.  If a plan sponsor wishes to provide this relief, it is also not an all or nothing proposition.  A plan sponsor can determine the extent to which it will permit election changes and which changes it wishes to permit.  The IRS acknowledges that the flexibility it is affording in this Notice can create adverse selection and it acknowledges that an employer may only wish to permit those changes that result in increased or improved coverage.   In addition, plan sponsors are permitted to limit mid-year elections in flexible spending account plans to amounts no less than amounts that have already been reimbursed during the plan year.

This relief is retroactive and can be applied as early as January 1, 2020.  If you wish to provide some or all of this flexibility to your plan participants, your Section 125 plan must be amended.  This guidance gives you until December 31, 2021 to adopt any needed amendments retroactively as far back as January 1, 2020, as long as you are operating the plan in accordance with the terms of the amendment and you inform all employees eligible to participate in the Section 125 plan of the changes to the plan.  Interestingly, the guidance does not specify when such notification must be permitted.

Please stay tuned for additional posts from us on the other changes included in these notices, including significant relief for participants relating to their health FSAs.

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