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Section 125 Mid-Year Election Change Rules

To assist with the issues presented by the Novel Coronavirus outbreak, the Internal Revenue Service (IRS) released Notice 2020-29, which provides flexibility for mid-year election changes under a Section 125 cafeteria plan during 2020.

This flexibility has been designed to encourage employers, who sponsor health flexible spending accounts (FSAs) and dependent care assistance programs (DCAPs), to give more options to employees during this time of distress.

For employer-sponsored health coverage, a Section 125 cafeteria plan may permit an employee to prospectively:

  • Make a new election if the employee previously 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;
  • Revoke an existing election, 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; and
  • Revoke an election, make a new election, or decrease or increase an existing election applicable to an FSA or DCAP account.

A plan may permit an employee to make any of the election changes described above, regardless of whether they satisfy existing mid-year election change rules. These changes go hand in hand with the options provided by the IRS regarding plan participants permitted to utilize unused amounts in their FSA and DCAP accounts.

An employer using this relief provided by the IRS may determine the extent to which such changes are permitted and applied. If these changes are permitted and utilized by employees, the employer must adopt a plan amendment by December 31, 2021. The amendment may be retroactive to January 1, 2020.

It is important for employers to note that changes to a plan may also implicate other applicable laws, such as requirements under the Employee Retirement Income Security Act (ERISA).

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Questions regarding these details? Feel free to reach out to the Creative Benefits Team at solutions@creativebenefitsinc.com or 866-306-0200.