Expertise Beyond the Numbers

IRS Allows Midyear Changes to Employer Cafeteria Plans Due to COVID-19

SC&H Key Takeaways

  • As a result of COVID-19, the IRS is allowing midyear changes to employer Section 125 Cafeteria Plans for tax year 2020.
  • You can now make changes to employer health benefits, health FSAs, and dependent care assistance programs.
  • Health FSA carryover amount increased from $500 to $550.

A Section 125 cafeteria plan is an employer-sponsored plan that allows employee participants to choose between two or more benefits. Common benefits include group-term life insurance coverage, health coverage, health flexible spending arrangements (FSAs), health savings accounts (HSAs), and dependent care assistance programs.

Under normal circumstances, employee benefits elections made under a cafeteria plan are made before the beginning of the plan year and those elections are irrevocable. You cannot change them during the plan year. However, due to the COVID-19 crisis, the IRS relented on the irrevocability of the election.

On Tuesday, May 12, 2020, the IRS issued Notice 2020-29. This notice allows for midyear changes to employer cafeteria plans. Employees can now add new benefits, delete unnecessary benefits, or make other changes to existing benefits.

These changes can help employees whose circumstances have changed as a result of COVID-19. For example, many employees with children who are now working from home and whose daycare facilities are shutdown may have a reduced need for dependent care assistance benefits. They can reduce or eliminate that benefit entirely.

The IRS also issued Notice 2020-33. This notice increases the permitted health FSA carryover amount from $500 to $550, a $50 increase. FSAs are a use it or lose it benefit. Any remaining amount in excess of $550 not used by year-end will be forfeited back to the plan. The $550 will carry over to the next plan year.

If you have any questions or would to speak with one of our team members, please don’t hesitate to reach out. SC&H is here to help.