IRS Guidance Allows Certain Mid-Year Benefit Election Changes in Response to COVID-19

On May 19, the IRS issued Covid-19 Guidance Under 125 Cafeteria Plans & Related to High Deductible Health Plans, 2020-22 I.R.B. 864 (2020) which permits an employer to amend its code section 125 cafeteria plan (Cafeteria Plan) to allow certain mid-year election changes, which are generally prohibited, related to health coverage, health flexible spending accounts and dependent care assistance programs as a result of 2019 Novel Coronavirus (COVID-19).

A Cafeteria Plan is an arrangement pursuant to which an employer offers employees the ability to choose between cash and one or more qualified benefit. This type of arrangement is what allows employees to get certain pre-tax benefits, such as paying for medical premiums on a pre-tax basis. In general, elections for benefits provided through a Cafeteria Plan are irrevocable for a plan year, however, if an employer desires, it can allow for certain prospective election changes as a result of a change in status or change in the cost of coverage, amongst other things. Employers are not required to allow for any of the permissible mid-year election changes specified under 26 U.S.C.A. § 125 (West) (the “Code”). In general, health flexible spending accounts may but are not required to allow participants to (i) carry over a certain amount in their health flexible spending account at the end of a plan year to use toward eligible medical expenses incurred in the subsequent year or (ii) use unused amounts during a grace period of up to two months and 15 days in the following year. Dependent care assistance programs may provide for a grace period but cannot permit carryover of unused funds.

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