Over the past six months, the federal government has enacted new legislation and provided guidance impacting cafeteria plans, health and dependent care flexible spending accounts (FSAs), health savings accounts (HSAs), health reimbursement arrangements (HRAs) and high-deductible health plans (HDHPs).
This legislation includes the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), with guidance issued under three IRS notices (Notices 2020-15, 2020 -29 and 2020-23) and the U.S. Department of Labor Employee Benefits Security Administration Disaster Relief Notice 2020-01.
Below is a summary of changes made:
The IRS has issued guidance allowing HDHPs to provide benefits for the testing and treatment of COVID-19 without a deductible, or with a deductible below the applicable HDHP minimum deductible (self-only or family).
Under the guidance, a health plan that otherwise meets the HDHP requirements will not fail to qualify as an HDHP if it provides medical care and items related to COVID-19 testing and treatment, including telehealth and other remote care services, before the applicable HDHP minimum deductible is satisfied. This means individuals can remain covered under HDHPs that provide such benefits without any adverse effect on HSA eligibility.
The guidance does not modify earlier direction regarding HDHP requirements in any other ways, including vaccinations (which continue to be classified as preventive care for purposes of determining whether a health plan qualifies as an HDHP). The IRS also reminds participants with coverage in an HDHP or other health plan to consult with their carriers on the benefits provided for COVID-19 testing and treatment, including any deductible or other cost-sharing.
Over-the-counter (OTC) medications
OTC medications are now reimbursable without a prescription or doctor’s note. The FDA defines OTC medications as a drug product marketed for use by a consumer without the need of a supervising healthcare professional to obtain the drug. While OTC medications are now reimbursable without prescription, nutritional supplements, herbal remedies and most vitamins are not considered drugs or medication by the FDA. These items are recognized as food and still require a doctor’s note or prescription for reimbursement.
In addition, the CARES Act recognizes menstrual care products as medical care. As such, they are now reimbursable by HSAs, FSAs and HRAs. Under the law, menstrual care products are defined as tampons, pads, liners, cups, sponges or other similar items used in respect to menstruation.
The characteristics for OTC drugs include:
- The item or product has an acceptable margin of safety.
- The item or product has low potential for abuse/misuse when widely available.
- A healthcare practitioner is not needed for the safe and effective use of the product.
- The product is labeled adequately (active ingredients, purpose, instructions, warnings, expiration date, storage guidelines, etc.)
Documentation for OTC reimbursement: Though prescriptions are no longer necessary for OTC medications to be reimbursed, employees still need to provide documentation to show proof of a valid expense. The documentation should include the date the item was purchased, the cost of the item and a description of the item. This information is generally provided on a grocery or drug store receipt.
Effective date of change: The CARES Act was officially signed into law on March 27, 2020. While certain provisions are temporary, the provisions for OTC medications and menstrual products are both permanent and effective retroactively to January 1, 2020.
HSA and HRA coordination: The CARES Act changes for OTC medications and menstrual care products affect both HSAs and HRAs. These plans must be coordinated to ensure the funds are used correctly. If an individual has an HSA and an HRA at the same time, they must exhaust their HSA funds first prior to meeting the insurance plan deductible, before using their HRA to be reimbursed for these items.
Mid-year election changes
The IRS announced it is permitting additional flexibility for mid-year elections under a Section 125 cafeteria plan during calendar year 2020 for employer-sponsored health plan coverage, and health and dependent care FSAs.
Elections under a cafeteria plan generally are irrevocable and must be made before the first day of the plan year — except a plan may permit an employee that experiences a change in status or a significant change in the cost of coverage to revoke and make a new election during a period of coverage. Because many employees will not meet that standard due to the pandemic, the IRS will allow employers an option that gives employees the ability to change their elections mid-year. Therefore, for mid-year elections made during calendar year 2020, a cafeteria plan may permit employees who are eligible to make salary reduction contributions under the plan to:
- For employer-sponsored health coverage, 1) make a new election on a prospective basis if the employee initially declined to elect employer-sponsored health coverage; 2) revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis; and 3) 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. For health FSA and/or dependent care assistance program, on a prospective basis revoke revoke an election, make a new election or decrease or increase an existing election applicable to a health FSA and/or dependent care assistance program on a prospective basis.
The relief may be applied retroactively to January 1, 2020. Employers are allowed to determine the extent the additional elections will be permitted to as long as they are applied in a nondiscriminatory manner, and may rely on the employee's attestation regarding other coverage absent actual knowledge to the contrary. The notice provides sample language that may be used.
The guidance issued also provides increased flexibility for grace periods to apply unused amounts in health FSAs to medical care expenses and unused amounts in dependent FSAs to dependent care incurred through December 31, 2020. For amounts that are unused and that remain in a health or dependent care FSAs, the extended grace period provision applies on or after January 1, 2020 and on or before December 31, 2020 (i.e., grace period that expired on March 15, 2020). The notice cautions that if the period for incurring claims is extended under a health FSA that is not (or is not amended to be) HSA-compatible, an individual with unused amounts remaining at the end of a plan year or grace period ending in 2020 will not be eligible to contribute to an HSA during the extended period. This extension of time for incurring claims is available both to a cafeteria plan that has a grace period and a plan that provides for carryover (notwithstanding the general rule that a health FSA may not have both a carryover and a grace period).
Permitted carryover for health FSAs increased to $550
The IRS issued guidance that will allow employers to increase the carryover limit for health FSAs from $500 to $550 related to unused amounts remaining as of the end of a plan year. That amount may be carried over to pay for or reimburse a participant for out-of-pocket expenses for medical care incurred during the following plan year. This provision only applies to plans that previously elected the carryover provision. The increase reflects indexing for inflation, and this indexing parallels the indexing that applies to the limit on salary reduction contributions. The $550 limit is 20% of the current inflation-adjusted $2,750 limit on health FSA contributions. The cost-of-living allowance for the salary reduction contribution will increase in increments of $50, which means the carryover, by default, will increase in increments of $10.
Individual coverage HRAs
The IRS has clarified that a health plan may reimburse individual insurance policy premium expenses incurred before the beginning of the plan year for coverage provided during the plan year. This provision will assist with implementing individual coverage HRAs.
Time-sensitive required employer actions related to recent IRS guidance/plan amendments
Employer sponsors will need to determine whether they wish to incorporate the following changes and, if so, work with their FSA administrator to implement, inform employees of changes and make the necessary plan amendments timely.
1. For employers with health flexible spending accounts: Determine whether to:
- Allow for reimbursement of OTC drugs, menstrual products and/or telehealth. If so, the effective date must be decided. (This can be retroactive to January 1, 2020 and applies to each succeeding year thereafter and amend no later than December 31, 2020 — for 2020 implementation — or later if adopted at a later date).
- Offer an extended period to incur FSA claims in calendar year 2020 and whether to offer mid-year election changes (amend no later than December 31, 2021).
- Offer increased $550 health FSA carryover for 2020 and beyond (amend no later than the last day of the plan year from which amounts may be carried over — by December 31, 2020 for a calendar plan year).
2. For employers that offer a pre-tax benefit for certain insurance coverages: Consider whether to offer new mid-year election change opportunities during calendar year 2020 and coordinate with all applicable insurance carriers and stop loss providers.
How Wipfli can help you adjust to these healthcare changes
Employers and practitioners have been seeking cafeteria plan relief in connection with the COVID-19 pandemic. Those who maintain or work with their employer’s plans must familiarize themselves with the recent IRS guidance, with the understanding that most of the changes provide discretion to employers and require plan amendments. Key plan provisions remain in place: retroactive election changes are not generally permitted, and unused contributions must be forfeited subject to limited exceptions such as the carryover mentioned above or an elected grace period within a few months after the plan year end. Changes will need to be communicated to employees and administrative and payroll procedures put in place by plan sponsors.
Note that there has been no relief provided yet for 2021. Given the extended duration of the pandemic across the country, it’s likely that additional relief may be necessary for 2021.
Now is a good time to also review your cafeteria plan document to make sure your plan is in compliance with the law. Wipfli maintains hundreds of plans for our clients and has provided a detailed instructions and recommendations to clients utilizing our plan documents. If you have interest in learning more about how these changes impact your plan or are interested in utilizing our services, please contact your Wipfli relationship manager.
Click here to learn more about Wipfli’s human capital management services, or continue reading on:
How the CARES Act affects retirement plans
Health Savings Account cost-of-living adjustments for 2021
Taking the fear out of plan conversions