Under the Radar Benefit Change: Employees Making Mid-Year Health Insurance Changes

By Anthony Kaylin, courtesy of SBAM Approved Partner ASE

The Internal Revenue Service (IRS) made it easier for employees to make mid-year changes to their health insurance coverage for 2020 during the Coronavirus pandemic. Notice 20-29 allows employers to amend their healthcare plans so employees can now make mid-year changes that would be in effect for the rest of the year. For instance, an employee who declined coverage could enroll in a plan, and current enrollees could change plans or add or drop family members.  Prior to this notice, decisions made during the election period were irrevocable until the end of the plan year.

More specifically, the IRS is allowing for increased flexibility with respect to 2020 mid-year elections under IRS Code Section 125 cafeteria plan related to employer-sponsored health coverage, health Flexible Spending Arrangements (health FSAs), and dependent care assistance programs.  The employer is given permission to amend plans to allow for mid-year employee changes. The employer must adopt a plan amendment on or before December 31, 2021 and may be effective retroactively to January 1, 2020.

Midyear election changes include employer-provided accident and health plans excludable under Code Sections 105(b) and 106, health FSAs excludable under Code Sections 105(b) and 106, and dependent care assistance programs excludable under Code Section 129.   For unused amounts remaining in a health FSA or a dependent care assistance program under the Section 125 cafeteria plan as of the end of a grace period or plan year ending in 2020, a Section 125 cafeteria plan may permit employees to apply those unused amounts to pay or reimburse medical care expenses or dependent care expenses, respectively, incurred through December 31, 2020 subject to the carryover limit (currently $550). 

The IRS stated in the Notice that due to the nature of the public health emergency posed by COVID-19, in particular, unanticipated changes in the availability of certain medical care and dependent care, employees may be more likely to have unused health FSA amounts or dependent care assistance program amounts (or have larger unused health FSA amounts or dependent care assistance program amounts) as of the end of plan years, or grace periods, ending in 2020.  The employee may wish to have an extended period during which to apply their unused health FSA amounts or dependent care assistance program amounts to pay or reimburse medical care expenses or dependent care expenses.   Elective medical procedures and childcare expenses have been delayed because of the pandemic and shelter-at-home orders.

Notice 20-29 does not allow for extensions for flexible spending accounts that began their year in January.  Employees may halt their savings now, in most instances, and try to spend what they’ve accumulated so far before they must forfeit it next year.

Cynthia Cox, a vice president at the Kaiser Family Foundation, a health research group, said employers might want new flexibility as a way of encouraging reluctant employees to return to work during the pandemic.  “I can imagine being an uninsured worker and being hesitant about returning to work and exposing myself to the virus without having health insurance,” she said.

To accept an employee’s revocation of an existing election for employer sponsored health coverage, the employer must receive an attestation in writing that the employee is enrolled, or immediately will enroll, in other comprehensive health coverage not sponsored by the employer. The employer may rely on the written attestation provided by the employee, unless the employer has actual knowledge that the employee is not, or will not be, enrolled in other comprehensive health coverage not sponsored by the employer. The following is an example of an acceptable attestation under the IRS Notice:

Name:  _______________________ (and other identifying information requested by the employer for administrative purposes).

 I attest that I am enrolled in, or immediately will enroll in, one of the following types of coverage: (1) employer-sponsored health coverage through the employer of my spouse or parent; (2) individual health insurance coverage enrolled in through the Health Insurance Marketplace (also known as the Health Insurance Exchange); (3) Medicaid; (4) Medicare; (5) TRICARE; (6) Civilian Health and Medical Program of the Department of Veterans Affairs (CHAMPVA); or (7) other coverage that provides comprehensive health benefits (for example, health insurance purchased directly from an insurance company or health insurance provided through a student health plan).

 Signature:  ______________________

An employer utilizing this relief under Section 125 is not required to provide unlimited election changes but may, in its discretion, determine the extent to which such election changes are permitted and applied. For example, to protect employees from potentially bad decisions, the Notice allows employers to limit elections to circumstances in which an employee’s coverage will be increased or improved as a result of the election (for example, by electing to switch from self-only coverage to family coverage, or from a low option plan covering in-network expenses only to a high option plan covering expenses in or out of network).

If employers are contemplating allowing midyear changes, work with employment counsel and benefit consultants to ensure the proper methodology is used, as this area is a highly technical one.