health FSAs | Fraser Blog

IRS Announces 2022 Increase for Health FSAs

The IRS has just released its 2022 annual inflation adjustments, in which it announced that the Code section 125 dollar limitation on voluntary employee salary reductions to health flexible spending arrangements (health FSAs) is increasing to $2,850.

The IRS annual inflation adjustments for more than 60 tax provisions, including health FSAs, qualified transportation fringe benefits, adoption assistance, medical savings accounts, and qualified small employer HRAs, can be found in Rev. Proc. 2021-45.

With regard to the health FSA increase for 2022, Rev. Proc. 2021-45 reiterates that cafeteria plans can be written to allow carryovers of unused health FSA amounts up to a maximum of $570. However, by way of temporary relief and if the cafeteria plan was amended, leftover amounts in the dependent care FSA and/or the health FSA can be carried over from the 2021 plan year to the 2022 plan year. This is allowed under Notice 2021-15 and was previously described in our March 8, 2021 Client Alert.

Although open enrollment season is about to be in full swing for most, employers should ensure that their salary reduction agreements, plan documents, and related enrollment materials are updated to reflect any changes in benefits for the upcoming plan year.

This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.

Elizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, in both 2019 and 2015, Beth was selected as “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers, and in 2017 as one of the Top 30 “Women in the Law” by Michigan Lawyers Weekly. Contact her for more information on this reminder or other matters at 517.377.0826 or elatchana@fraserlawfirm.com.

Brian T. Gallagher is an attorney at Fraser Trebilcock specializing in ERISA, Employee Benefits, and Deferred and Executive Compensation. He can be reached at (517) 377-0886 or bgallagher@fraserlawfirm.com.

Congress Provides Welcome Relief for FSAs Amidst Continuing Pandemic

The COVID-19 pandemic continues to wreak havoc, affecting lives not only on a personal level, but on a professional one. Employers at a minimum must be well versed in various new employment and labor issues as well as employee benefit matters which greatly affect their workforce.

Due to closure of schools and day cares throughout 2020, many dependent care flexible spending accounts (FSAs) remain overfunded, leaving numerous employees with the threat of forfeited account balances. Similarly, due to delay and cancellation of certain medical procedures, health FSA amounts were also unused. While the IRS relaxed Code section 125 change in election rules in May of 2020, many employees simply did not have enough claims to use up the funds in their FSA accounts, resulting in forfeiture risks.

However, Congress passed the Consolidated Appropriations Act, 2021 (“Act”) late December 2020, which further relaxes the otherwise strict election changes rules of Code section 125, allows carryovers of account balances, extends grace periods, and increases the dependent age for dependent care FSA qualifying expenses.

Background

Once an election is made under a Section 125 cafeteria plan, that election is irrevocable for the entire plan year, unless (1) one of the mid-year qualifying change in election events occurs as set forth in Treas. Reg. 1.125-4; and (2) the employer’s cafeteria plan incorporates the mid-year change rule.

However, in May 2020, the IRS released IRS Notice 2020-29 which relaxed the Code section 125 rule requiring qualifying change in status events in order to make a mid-year change in election. With respect to FSAs, employers wanting to implement such changes could amend their plan documents in order to allow employees to revoke an election, make a new election, or decrease or increase an existing election applicable to a health or dependent care FSA on a prospective basis. These changes apply regardless of whether the basis for the election change meets the Treas. Reg. 1.125-4 requirements. Please note the term prospective. Employees could not retroactively change their elections.

This was a voluntary change and was only for the 2020 plan year.

Additionally, Notice 2020-29 provided flexibility and allowed employees to “spend down” their FSAs through December 31, 2020. As calendar year plans already allowed expenses to be incurred through December 31, 2020, this Notice did not provide relief in those circumstances. It instead applied to plans with grace periods that ended in 2020 or whose plan year ended in 2020. Upon amendment, participants in those plans could continue to incur eligible expenses through December 31, 2020 and submit requests for reimbursement consistent with plan terms.

This relief ended on December 31, 2020, and, aside from any already applicable grace periods, no relief was provided for employees who had unused FSA amounts after that date, which are subject to forfeiture.

Consolidated Appropriations Act, 2021

Relief is found in the newly passed Consolidated Appropriations Act, 2021.

This Act, in part, loosens certain rules associated with both health and dependent care FSAs. Specifically, upon amendment to appropriate plan documents, the Act allows for the following:

Carryover to the 2021 Plan Year: This provision allows any unused benefits or contributions in FSAs from plan years ending in 2020 to be carried over to the plan year ending in 2021;
- The Act states the carryover must follow rules similar to the health FSA rules… however, while health FSA carryovers are subject to a $550 cap, the Act specifically states that any unused benefits or contributions may be carried over.
- Significantly, dependent care FSAs were not previously allowed to have a carryover provision.
Carryover to the 2022 Plan Year: This provision allows any unused benefits or contributions in FSAs from plan years ending in 2021 to be carried over to the plan year ending in 2022;
- Again, the Act states the carryover must follow rules similar to the health FSA rules…
- This provision is important especially in situations involving the dependent care FSAs. These FSAs have a maximum reimbursement of $5,000 per calendar year. If an employee is allowed to carry over unused contributions into 2021 from 2020, but had also elected a full $5,000 for plan year 2021, s/he would have an overfunded account. This can be handled in one of two ways: (1) this additional carryover provision from 2021 to 2022, and/or (2) prospective election changes for FSAs for plan years ending in 2021 without regard to the strict status change rules (see last bullet below). With regard to the latter, employees can change their dependent care election for 2021 to prevent future contributions from being made.
Grace Periods: For health or dependent care FSAs that have a grace period for plan years ending in 2020 or 2021, the grace period may be extended from the traditional two months and 15 days to a full 12 months after the end of such plan year in order for unused benefits or contributions to be utilized.
Post-Termination Health FSA Reimbursements: Health FSAs are now allowed to continue to reimburse former participants for claims incurred post-termination similar to dependent care FSAs, namely:
- Employees who ceased participation in the plan during calendar years 2020 or 2021 may continue to receive reimbursements from unused benefits or contributions through the end of the plan year in which participation ceased.
Dependent Care FSA Age Out Rule: In order for eligible employees to receive reimbursement for dependent care assistance, their dependent must be under the age of 13 when the expenses were incurred. However, for employees who were enrolled in the dependent care FSA (as long as the regular enrollment period was on or before January 31, 2020), age 14 is substituted for age 13 for the last plan year, and, if the employee had an unused balance in the FSA for such plan year, age 14 is also substituted for the subsequent plan year with respect to those unused amounts.
Change in Election: Similar to the IRS Notice 2020-29, but for plan years ending in 2021, health and dependent care FSAs may allow employees to make mid-year election changes prospectively without regard to change in status rules.

To allow any of the above provisions, the cafeteria plan or arrangement including the FSAs must be amended to allow for such provisions no later than the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective (so generally by December 31, 2022). The amendment may be retroactive as long as the plan is operated consistently with the terms of the amendment beginning its effective date.

Employer Action

Plan sponsors must determine whether they wish to proceed with any of the above provisions, largely in part depending on whether plan year 2020 would otherwise result in unprecedented forfeitures due to the pandemic. If so, they must communicate such provisions with their workforce and must administer the cafeteria plan or arrangement accordingly as of the amendment’s effective date, even if the amendment is adopted at a later date.

This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.

We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.

Client Alert: Health FSA Maximum Remains the Same for 2021

The IRS has just released its 2021 annual inflation adjustments, in which it announced that the Code section 125 dollar limitation on voluntary employee salary reductions to health flexible spending arrangements (health FSAs) is staying at $2,750.

The IRS annual inflation adjustments for more than 60 tax provisions, including health FSAs, can be found in Rev. Proc. 2020-45. This guidance reiterates that cafeteria plans can be written to allow carryovers of unused health FSA amounts up to a maximum of $550.

This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.

Client Alert: PCORI Fees Are Back! Payment Due July 31st

PCORI PAYMENTS ARE BACK!

Plan Sponsors of Applicable Self-Funded Health Plans Must Make PCORI Fee Payment By July 31, 2020

The Internal Revenue Service recently released Notice 2020-44 which sets forth the PCORI amount imposed on insured and self-funded health plans for policy and plan years that end on or after October 1, 2019 and before October 1, 2020. The Notice also provides transition relief for calculating the applicable fee for this same period.

See IRS Notice 2020-44

Background

The Patient-Centered Outcomes Research Institute (PCORI) fee is used to partially fund the Patient-Centered Outcomes Research Institute which was implemented as part of the Patient Protection and Affordable Care Act.

The PCORI fees were originally set to expire for plan years ending before October 1, 2019. However, on December 20, 2019, the Further Consolidated Appropriations Act was enacted and extended the fee to plan years ending before October 1, 2029.

The fee is calculated by using the average number of lives covered under a plan and the applicable dollar amount for that plan year. Code section 4375 imposes the fee on issuers of specified health insurance policies. Code section 4376 imposed the fee on plan sponsors of applicable self-insured health plans. This Client Alert focuses on the latter.

Transition Relief for Counting Covered Lives

For self-funded plans, the average number of covered lives is calculated by one of three methods: (1) the actual count method; (2) the snapshot method; or (3) the Form 5500 method.

However, due to the anticipated end to the PCORI fee, plan sponsors did not anticipate the need to calculate the number of covered lives. Therefore, transition relief is allowed for plan years ending on or after October 1, 2019 and before October 1, 2020, and a plan sponsor may use any reasonable method for calculating the average number of lives, as long as it is applied consistently for the plan year. Specifically, Notice 2020-44 provides as follows:

Plan sponsors may continue to use one of the following three methods specified in the regulations under § 4376 to calculate the average number of covered lives for purposes of the fee imposed by § 4376: the actual count method, the snapshot method, and the Form 5500 method. See Treas. Reg. § 46.43761(c)(2)(i). In addition, for plan years ending on or after October 1, 2019, and before October 1, 2020, plan sponsors may use any reasonable method for calculating the average number of covered lives. If a plan sponsor uses a reasonable method to calculate the average number of covered lives for plan years ending on or after October 1, 2019, and before October 1, 2020, then that reasonable method must be applied consistently for the duration of the plan year.

Adjusted Applicable Dollar Amount

Moreover, Notice 2020-44 sets the adjusted applicable dollar amount used to calculate the fee at $2.54. Specifically, this fee is imposed per average number of covered lives for plan years that end on or after October 1, 2019 and before October 1, 2020.

Deadline and How to Report

The PCORI fee is due by July 31, 2020 and must be reported on Form 720.

Instructions are found here (see Part II, pages 8-9): http://www.irs.gov/pub/irs-pdf/i720.pdf

The Form 720 itself is found here (see Part II, page 2): http://www.irs.gov/pub/irs-pdf/f720.pdf

Form 720, as well as the attached Form 720-V to submit payment, must be used to report and pay the requisite PCORI fee to the IRS. While Form 720 is used for other purposes to report excise taxes on a quarterly basis, for purposes of this PCORI fee, it is only used annually and is due by July 31st of each relevant year.

As previously advised, plan sponsors of applicable self-funded health plans are liable for this fee imposed by Code section 4376. Insurers of specified health insurance policies are also responsible for this fee.

For plan years ending on or after October 1, 2017 and before October 1, 2018, the fee is $2.39 per covered life.
For plan years ending on or after October 1, 2018 and before October 1, 2019, the fee is $2.45 per covered life.
For plan years ending on or after October 1, 2019 and before October 1, 2020, the fee is $2.54 per covered life.

Again, the fee is due no later than July 31 of the year following the last day of the plan year.

There are specific calculation methods used to configure the number of covered lives and special rules may apply depending on the type of plan being reported. While generally all covered lives are counted, that is not the case for all plans. For example, HRAs and health FSAs that are not excepted from reporting only must count the covered participants and not the spouses and dependents. The Form 720 instructions do not outline all of these rules.

More information about calculating and reporting the fees can be found here: https://www.irs.gov/newsroom/patient-centered-outcomes-research-institute-fee

Questions and answers about the PCORI fee and the extension may be found here; however, please note that this site does not include the most recent fee of $2.54 for plan years ending on or after October 1, 2019 and before October 1, 2020: https://www.irs.gov/affordable-care-act/patient-centered-outcomes-research-trust-fund-fee-questions-and-answers

As you are well aware, the law and guidance are continually evolving. Please check with your Fraser Trebilcock attorney for the most recent updates.

This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.

Client Alert: IRS Relaxes Section 125 Mid-Year Change Rules & Increases Health FSA Carryovers

In two recently released Notices, the Internal Revenue Service (IRS) relaxes the irrevocability rule under Internal Revenue Code section 125 relating to cafeteria plans, increases carryover allowances for health flexible spending accounts (health FSAs), extends the period of time to “spend down” unused health FSA and dependent care FSA amounts, and expands previous guidance to provide that certain covered services will not affect high deductible health plan (HDHP) status… retroactive to January 1, 2020.

See:

IRS Notice 2020-33

IRS Notice 2020-29

Section 125 Plan participants have found themselves in difficult situations as they had elected certain health and dependent care FSA amounts to use during 2020 only to find that certain medical procedures were delayed or canceled and that day care facilities were closed due to COVID-19. Moreover, group health plans are changing based on certain new coverage requirements, incomes are dropping, and layoffs are occurring. Employees are finding themselves in a position where they can no longer afford such coverage; however, IRS procedures in many of these situations would not support mid-year election changes. These are just a few examples of election issues currently occurring.

The IRS, therefore, is relaxing the typical rigid Section 125 rules. However, in order to take advantage of this leniency, employers must amend their Section 125 cafeteria plans.

Section 125 Irrevocability Rules Relaxed

However, IRS Notice 2020-29 relaxes these rules during calendar year 2020 relating to employer-sponsored health coverage, health FSAs, and dependent care FSAs, and the relief may be applied retroactively to periods on or after January 1, 2020. These changes apply regardless of whether the basis for the election change meets the Treas. Reg. 1.125-4 requirements. A plan amendment is required.

Specifically, Notice 2020-29 provides as follows:

For mid-year elections made during calendar year 2020, a section 125 cafeteria plan may permit employees who are eligible to make salary reduction contributions under the plan to:
- with respect to employer-sponsored health coverage,
  - make a new election on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage;
  - revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis, including changing from self-only to family coverage; and
  - revoke an existing election 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; sample attestation language is provided in the Notice;
- revoke an election, make a new election, or decrease or increase an existing election applicable to 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 FSA on a prospective basis.

An employer does not need to adopt these more lenient rules and can continue with its current plan procedures. However, given that they could help a number of employees, it is something to consider.

Increase in Carryovers to Health FSAs

If an employer’s cafeteria plan has a health FSA with a carryover provision, another allowable change is permitted. IRS Notice 2020-33 allows, upon plan amendment, for the 2020 plan year carryover to be increased to $550. Previously, only a $500 carryover was allowed. And if the plan is amended correctly, the $550 will likely increase in future years. Please note that this is not for any plan years which started in 2019 and ended in 2020… that carryover remains $500.

Specifically, IRS Notice 2020-33 increases the maximum carryover amount for plan years starting in 2020 to an amount equal to 20% of the maximum Section 125(i) salary reduction contribution for that plan year. Therefore, the maximum amount allowed to be carried over from a plan year starting in 2020 to the immediately following plan year beginning in 2021 is $550 (20% of $2,750). A plan amendment must be made on or before the last day of the plan year that adopts the carryover increase; however, a special amendment timing rule exists for the 2020 plan year under Notice 2020-29.

Moreover, for the remainder of 2020, employees are permitted to change their elections mid-year in order to increase their health FSA (including an initial election to fund a health FSA) due to the increased carryover under Notice 2020-29. However, these changes must be applied prospectively only.

Significantly, Notice 2020-33 provides as follows:

Although only future salary may be reduced under the revised election, amounts contributed to the health FSA after the revised election may be used for any medical care expense incurred during the first plan year that begins on or after January 1, 2020.

An amendment must be made on or before December 31, 2021 and may be effective retroactively to January 1, 2020 (or the first day of the plan year in 2020 if later), provided that the employer informs all eligible individuals of the changes to the plan.

Extended Period to Spend Down FSAs

Many employees had elected amounts in dependent care and health FSAs and were (or are) unable to use them due to reasons such as closed day care facilities or canceled medical procedures. Under the strict Code section 125, unused amounts in these accounts are forfeited at the end of the Plan Year, subject to any carryover provisions (applicable to health FSAs only) or grace periods.

Here, Notice 2020-29 provides flexibility and allows employees to “spend down” their accounts through December 31, 2020. As calendar year plans already allow expenses to be incurred through December 31, 2020, this Notice does not provide relief. It instead applies to plans with grace periods that end in 2020 or whose plan year ends in 2020. Upon amendment, participants in those plans may continue to incur eligible expenses through December 31, 2020 and submit requests for reimbursement consistent with plan terms.

Specifically, the Notice provides:

For unused amounts remaining in a health FSA or a dependent care assistance program under the section 125 cafeteria plan as of the end of a grace period or plan year ending in 2020, a section 125 cafeteria plan may permit employees to apply those unused amounts to pay or reimburse medical care expenses or dependent care expenses, respectively, incurred through December 31, 2020.

Please see below for one of the examples listed in the Notice:

Example 1. Employer provides a health FSA under a § 125 cafeteria plan that allows a $500 carryover for the 2019 plan year (July 1, 2019 to June 30, 2020). Pursuant to this notice and Notice 2020-33, Employer amends the plan to adopt a $550 (indexed) carryover beginning with the 2020 plan year, and also amends the plan to adopt the temporary extended period for incurring claims with respect to the 2019 plan year, allowing for claims incurred prior to January 1, 2021, to be paid with respect to amounts from the 2019 plan year.

Employee A has a remaining balance in his health FSA for the 2019 plan year of $2,000 on June 30, 2020, because a scheduled non-emergency procedure was postponed. For the 2020 plan year beginning July 1, 2020, Employee A elects to contribute $2,000 to his health FSA. Employee A is able to reschedule the procedure before December 31, 2020 and, between July 1, 2020 and December 31, 2020, incurs $1,900 in medical care expenses. The health FSA may reimburse Employee A $1,900 from the $2,000 remaining in his health FSA at the end of the 2019 plan year, leaving $100 unused from the 2019 plan year. Under the plan terms that provide for a carryover, Employee A is allowed to use the remaining $100 in his health FSA until June 30, 2021, to reimburse claims incurred during the 2020 plan year. Employee A may be reimbursed for up to $2,100 ($2,000 contributed to the health FSA for the 2020 plan year plus $100 carryover from the 2019 plan year) for medical care expenses incurred between January 1, 2021 and June 30, 2021. In addition, Employee A may carry over to the 2021 plan year beginning July 1, 2021 up to $550 of any remaining portion of that $2,100 after claims are processed for the 2020 plan year that began July 1, 2020. A grace period is not available for the plan year ending June 30, 2021.

Again, plan amendments will be required to accomplish the above and must be adopted on or before December 31, 2021. The amendment may be effective retroactively to January 1, 2020 as long as the above Notices are followed and the employees are informed.

Status of HDHPs

Last, the IRS extends certain previous relief for HDHPs retroactively, back to January 1, 2020. Specifically, Notice 2020-29 separately expands Notice 2020-15 to provide that reimbursement of expenses for testing and treatment of COVID-19 incurred on or after January 1, 2020 will not result in an HDHP to fail to be an HDHP under Code section 223. Additionally, testing and treatment for COVID-19 includes “the panel of diagnostic testing for influenza A & B, norovirus and other coronaviruses, and respiratory syncytial virus (RSV) and any items or services required to be covered with zero cost sharing under … the CARES Act.”

Moreover, telehealth and other remote care services provided on or after January 1, 2020 (applying only for plan years beginning on or before December 31, 2021) will not affect HDHP status. The CARES Act previously applied only for services incurred on or after March 27, 2020.

Conclusion

As always, consultation is important to determine if these changes will be of benefit to employers and their employees. Many factors should be considered, such as nondiscrimination rules, adverse selection with allowing mid-year changes, whether extending health FSA reimbursement provisions will negatively affect health savings accounts, and additional required employee communications.

As you are well aware, the law and guidance are rapidly evolving in this area. Please check with your Fraser Trebilcock attorney for the most recent updates.

This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.

Client Alert: FSAs, HRAs, and HSAs Can Reimburse Over-the-Counter Medications

One of the many changes brought forth under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) includes allowing pre-tax reimbursement of over-the-counter (“OTC”) medications effective January 1, 2020.

Specifically, the CARES Act amended Internal Revenue Code (the “Code”) sections 223(d) and 106(f) to remove the restriction that reimbursable medications are limited to prescribed drugs and insulin. Additionally, the CARES Act provides that expenses incurred for menstrual care products (as defined in Code section 223(d)(2)(D)) shall be treated as incurred for medical care. Affected reimbursement accounts include health flexible spending accounts (“health FSAs”), health savings accounts (“HSAs”), and health reimbursement accounts (“HRAs”).

This marks another change in course as to how to handle OTC medications. While OTC drugs were previously allowed under the Code, beginning January 1, 2011, the Affordable Care Act limited reimbursable medications to prescriptions and insulin. The CARES Act once again changes that, and while many of the CARES Act provisions include sunset dates, there is no expiration date for OTC reimbursements. With respect to HSAs, this change is effective for amounts paid after December 31, 2019. For health FSAs and HRAs, it is effective for expenses incurred after December 31, 2019.

Most health FSA and HRA plan documents specifically restrict reimbursement to prescription drugs and medications, including insulin. Therefore, if an employer chooses to allow reimbursements of OTC and menstrual care products from health FSAs and HRAs, plan amendments will most likely be required. HSAs are generally not employer sponsored products and, as such, would require no amendments.

While these are permissive changes, employers wanting to share some positive news to employees may want to allow them. Employee communication, as always, is of paramount importance, especially summaries of material modifications for ERISA plans.

This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.