IRS Allows Flexibility in §125 Plan Rules for 2020; Increases Maximum FSA Carryover

The IRS is allowing employers to extend the claim period for flexible spending arrangements (FSAs) and dependent care assistance programs and also allowing employees to make mid-year changes to §125 cafeteria plans [IR-2020-95, 5-12-20]. The changes may be applied retroactively to January 1, 2020. This guidance is due to COVID-19.

The IRS also raised the maximum carryover amount for health FSAs from $500 to $550 [Notice 2020-33]. This permanent change will be based on inflation indexing, which is used to determine the limit on salary reduction contributions under §125 cafeteria plans.

Mid-Year Elections Allowed

The IRS is allowing mid-year changes to elections during 2020 to §125 cafeteria plans for eligible employees. Employers may allow employees to:

• Make a new election on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage
• Revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis
• Revoke an existing election, provided that the employee attests in writing that the employee is enrolled or immediately will enroll in other health coverage

Employees may also revoke an election, make a new election, or decrease or increase an existing FSA election for health or dependent care assistance.

To learn more about federal and state laws, regulations, and information to keep your company's payroll operations in compliance, check out Payroll Source Plus!

Jyme Mariani, Esq., is Managing Editor of Payroll Currently and Payroll Information Resources for the APA.