The Internal Revenue Service (IRS) has issued new guidance, Notice 2020-29, in response to the COVID-19 pandemic, providing for temporary flexibility with respect to mid-year elections made during 2020 under Code section 125 cafeteria plans related to employer-sponsored health coverage, health Flexible Spending Arrangements (health FSAs), and dependent care Flexible Spending Arrangements (DC FSAs). The guidance provides additional temporary flexibility with respect to FSAs that extends the grace periods after which employees must forfeit their FSA balances. Further, the guidance clarifies that earlier relief provided for high deductible health plans (HDHPs) to cover COVID-19 expenses and a temporary safe harbor for telehealth services may be applied retroactively to January 1, 2020.

Flexibility for Mid-Year Elections

Elections under a section code 125 cafeteria plan are generally irrevocable and must be made prior to the first day of the plan year, except as provided under Treas. Reg. § 1.125-4 which allows employees to make mid-year election changes under certain circumstances such as if the employee experiences a change in status or there are significant changes in the cost of coverage.

Because of the unanticipated changes in the need for medical and child care as a result of the COVID-19 pandemic, the IRS has temporarily relaxed some of these restrictions on mid-year elections. During the 2020 calendar year, an employer may amend its cafeteria plan(s) to allow employees who are eligible to make salary reduction contributions under the plan(s) to make the following types of changes to their elections:

1. If an employee initially declined to elect employer-sponsored health coverage, the employee may newly elect health coverage on a prospective basis.
2. If an employee has elected health coverage, the employee may revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis. The employee may revoke the election and choose other health coverage (not sponsored by the employer) if the employee attests in writing that the employee is enrolled, or immediately will enroll, in such other coverage. The Notice provides an example of an acceptable written attestation.
3. For health FSAs, including limited purpose health FSAs compatible with HSAs, an employee may make a new election, revoke an election, or decrease or increase an existing election applicable on a prospective basis.
4. For DC FSAs, an employee may make a new election, revoke an election, or decrease or increase an existing election on a prospective basis.

Employers are not required to provide unlimited election changes, but may, in their discretion, determine the extent to which such election changes are permitted and applied. Thus, employers may set time limits on when to make elections and limit the options available to employees. However, changes are permitted on a prospective basis only and may not result in a failure to comply with the nondiscrimination rules applicable to cafeteria plans.

Flexibility for Grace Periods for Unused FSA Amounts

Under the carryover rule, a cafeteria plan may permit the carryover of unused amounts remaining in a health FSA as of the end of a plan year to pay or reimburse a participant for medical care expenses incurred during the following plan year, subject to the carryover limit. Currently, the limit is $500 (under separate IRS guidance, it will be increasing to $550). Alternatively, a cafeteria plan may permit a participant to apply unused amounts (including amounts remaining in a health FSA or dependent care FSA) at the end of a plan year to pay expenses incurred during a grace period of up to two months and 15 days immediately following the end of the plan year. A cafeteria plan may adopt either a carryover or grace period (or neither) but may not adopt both features for a health FSA.

Due to unanticipated changes in the availability of certain medical care and dependent care as a result of the COVID-19 pandemic, employees may not have been able to exhaust the amounts contributed to their health FSAs or DC FSAs for plan years, or grace periods, ending in calendar year 2020. To address those situations, Notice 2020-29 allows FSAs with plan years ending in 2020 to extend the period in which employees may incur expenses that may be reimbursed to the end of calendar year 2020. For example, if an FSA’s plan year ends on March 31 or if an FSA’s grace period ends on March 15, the plan may be amended to allow unused amounts remaining in health FSAs or DC FSAs for that year to pay or reimburse medical care expenses or dependent care expenses incurred at any time in the 2020 calendar year

Clarification of Prior HDHP Relief for COVID-19 Testing and Telehealth Services

Notice 2020-29 clarifies that the relief provided in Notice 2020-15 (released on March 11, 2020) regarding HDHPs, and expenses related to testing for and treatment of COVID-19, applies with respect to reimbursements of expenses incurred as far back as January 1, 2020, and makes certain other changes or clarifications in coordination with changes made by the Families First Coronavirus Response Act and the CARES Act.

Key Considerations

If an employer decides to amend its cafeteria plan(s) to allow for mid-year election changes or extend the grace period to apply unused FSA amounts for the 2020 plan year, the employer must amend the plan by December 31, 2021. The amendment may apply retroactively to January 1, 2020. The employer will need to inform all eligible employees of the changes to the plan, and must operate the plan in accordance with the Notice and other rules applicable to cafeteria plans.

Plan sponsors wishing to amend their plans should consult with their benefits counsel to ensure they are meeting their legal requirements. Ballard Spahr’s Employee Benefits and Executive Compensation attorneys can provide advice and assist plan sponsors in making plan amendments and other plan design changes under the new laws and other existing laws governing employee benefit plans.


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This alert is a periodic publication of Ballard Spahr LLP and is intended to notify recipients of new developments in the law. It should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult your own attorney concerning your situation and specific legal questions you have.