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IRS Issues New Section 125 and FSA Guidance

On Tuesday, May 12, 2020, the IRS issued Notice 2020-29 and Notice 2020-33.  These Notices included major changes to Section 125 and FSA benefits that may be financially beneficial to plan participants. Some provisions, however, require adoption by the plan. Here is a summary of the provisions included in each Notice:

IRS Notice 2020-29

  • If adopted by the plan, the Notice allows the plan to extend claims periods for FSA plan participants to apply unused amounts remaining in a Health FSA, Limited Purpose FSA, or Dependent Care Assistance Program for expenses incurred for those same qualified benefits through December 31, 2020.  This provision is available to any plan whose plan year ended in 2020, or whose grace period ended in 2020.  This provision would not be available to plans whose plan year ended on or before December 31, 2019 where the grace period was not previously adopted.
  • If adopted by the plan, the Notice allows individuals covered under Section 125 to make mid-year elections for health coverage, Health FSAs, and Dependent Care Assistance Programs, allowing them to respond to changes in needs as a result of the COVID-19 pandemic.  All changes must be prospective in nature; however, adoption of this provision removes the need for a qualifying event to have occurred to elect, reduce, or increase FSA contributions.
  • The Notice applies and changes earlier relief for high deductible health plans to cover expenses related to COVID-19, and a temporary exemption for telehealth services retroactively to January 1, 2020.

IRS Notice 2020-33

  • If adopted by the plan, the notice increases the limit for unused Health FSA (and Limited Purpose FSA) carryover amounts from $500, to a maximum of $550, as adjusted annually for inflation.  This increase applies to any plan year beginning in 2020.

Additional Changes

As we communicated in our Sentinel Alert on May 4, 2020, the Final Rule announced by the Agencies provided extensions to deadlines tied to benefit plans.  These extensions cover HIPAA Special Enrollment, COBRA, and claims filing.  As a follow up to that Alert, the Agencies have made it clear that the claim filing extensions do apply to any Health FSA, Limited Purpose FSA, and HRA (but not Dependent Care and Commuter Accounts).  This means that any plan year which was in its run-out period on or after March 1, 2020 will have an extended period of time to submit expenses incurred during the plan year, though the end date to submit claims will not be defined until the National Emergency is declared to be over.

Next Steps

Sentinel’s Health & Welfare Team will be hosting a webinar within the next week to review the legislative changes introduced in the IRS Notices referenced above, as well as what was introduced as part of the Final Rule.  Additionally, for all clients for whom Sentinel administers an FSA Plan, Sentinel will be reaching out via email in an effort to capture which changes, if any, your plan wishes to adopt in response to the release of IRS Notices 2020-29 and 2020-33.  Lastly, if you have questions about these changes, please contact your Sentinel FSA/HSA/HRA Account Manager directly to discuss the specifics as it relates to your plan.

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