On May 12, 2020, the IRS released Notice 2020-29, which:

• Provides temporary flexibility for mid-year election changes under a Section 125 cafeteria plan during calendar year 2020, and
• Allows employers to permit employees to apply unused amounts remaining in a health FSA or a DCAP at the end of a plan year ending in 2020 (or a grace period ending in 2020) to pay or reimburse expenses incurred through Dec. 31, 2020

The health FSA carryover limit for unused funds remaining at the end of a plan year is also increased from $500 to $550 for plan years beginning in 2020.

Permitted Election Changes
For employer-sponsored health coverage, a Section 125 cafeteria plan may permit an employee to prospectively:

• Make a new election if the employee previously declined coverage;
• Revoke an existing election and enroll in different health coverage sponsored by the employer; or
• Revoke an existing election, if the employee is or will be enrolled in other health coverage.

Employees may also prospectively revoke an election, make a new election or decrease or increase an existing election for a health FSA or DCAP. A plan may permit any of the election changes described in the notice, regardless of whether they satisfy existing mid-year election change rules.

Employer Requirements
An employer using this relief may determine the extend to which such changes are permitted and applied. If these changes are permitted, the employer must adopt a plan amendment by Dec. 31, 2021, and inform employees of the change. The amendment may be retroactive to Jan.1, 2020. Changes to the plan may also implicate other applicable laws, such as participant notification requirements under ERISA.

IRS Provides More Options for Unused Funds in Health FSAs and DCAPs

New COVID-19 Guidance for Section 125 Mid-year Election Change Rules