Tax implications of new employee options for employer health plans and flexible spending accounts announced by the IRS in response to COVID-19
With many employees furloughed or on reduced hours due to the COVID-19 pandemic, the Internal Revenue Service (IRS) has announced new options for employees to make mid-year employer health plan elections and flexible spending accounts elections and extend the grace period for flexible spending accounts for 2020. Generally, these elections can be made only once per year, with exceptions provided for an employee’s change of status or significant changes in coverage costs.
The assumptions that employees made during their 2020 benefit elections may have substantially changed since those elections were made at the end of 2019. Rather than waiting until the end of 2020 to make revised elections for 2021, the IRS is permitting employers to allow employees to make mid-year changes to those elections in 2020. The IRS is also giving greater carryover protection to employees utilizing flexible spending accounts.
- If an employee had initially declined employer health coverage for 2020, the employee may enroll in coverage on a prospective basis
- If an employee had initially made an employer health plan election, the employee may make a different election on a prospective basis
- An employee may revoke an existing election of employer health coverage on a prospective basis without making a new election if the employee attests in writing that he or she has other health coverage
- An employee may revoke an election, make a new election or revise an election with respect to a health flexible spending account or a dependent care flexible spending account, including limited purpose health FSAs
- Flexible spending accounts may be allowed to extend a carryover period or a grace period ending in 2020 to the end of 2020, as well as reimburse expenses incurred through the end of 2020
- An employer may allow an employee to make multiple mid-year election changes in 2020
- Employers have flexibility to adopt all, some or none of these changes, so long as it is done on a nondiscriminatory basis
- Employers adopting all or some of these changes are required to make plan amendments by December 31, 2021, retroactive back to January 1, 2020, as well as provide timely notice to employees
- A change in an employee’s health flexible spending account election could still affect the ability of an employee to make health savings account contributions during that period
- A health plan is permitted to reimburse premiums paid for coverage commencing in the plan year even if the covered individual actually paid the premium for the coverage in the prior year
- The IRS reaffirms that a high deductible health plan can pay for COVID-19 testing and treatment and telehealth services even if there is no deductible
Tax expert Mark Luscombe, JD, LL.M, CPA, Principal Federal Tax Analyst at Wolters Kluwer Tax & Accounting, can help explain the new election options and flexibility for flexible spending accounts.
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