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EMPLOYER TAX BRIEF
Carryover amount for Health FSAs has been increased
The IRS recently increased the carryover limit for Health Flexible Spending Arrangements (FSAs) to an amount indexed for inflation. The agency also clarified the ability of a health plan to reimburse individual insurance policy premium expenses incurred before the beginning of the plan year for coverage provided during the plan year.
Boosted maximum
Under IRS Notice 2020-33, the maximum $500 carryover amount for a plan year has been increased to an amount equal to 20% of the maximum salary reduction contribution under Internal Revenue Code Section 125(i) for that plan year.
For a plan year starting in 2020, the maximum unused amount that may be carried over to the following plan year beginning in 2021 is $550 (20% of $2,750). Future increases will be in $10 multiples.
Pertinent deadlines
Because Sec. 125 cafeteria plans must be expressed in writing, plans that offer Health FSAs may not use the increased carryover amount for a plan year that begins in 2020 (or a later year) unless they:
- Incorporate the increase in writing, or
- Are timely amended to set forth the increased amount.
A plan may be amended to adopt the increased carryover amount for a plan year that begins in 2021 (or later) at any time on or before the last day of the plan year.
Notice 2020-29 provides that an amendment for the 2020 plan year must be adopted on or before December 31, 2021, and may be effective retroactively to January 1, 2020, provided that the employer informs eligible participants in the Sec. 125 cafeteria plan of the plan changes.
Generally, a midyear change to a Health FSA isn’t allowed. However, per Notice 2020-33, employers may permit midyear elections under a Sec. 125 cafeteria plan. This includes initially electing to fund a Health FSA, provided the changes are applied only prospectively. Thus, individuals who wish to increase their Health FSA contributions or begin making such contributions in 2020 because of the increased carryover limit may do so.
Although only future salary may be reduced under the revised election, amounts contributed to the Health FSA after the revised election may be used for any medical care expenses incurred during the first plan year that begins on or after January 1, 2020.
Reimbursement timing
Notice 2020-33 also provides that a health plan may treat an expense for a premium for health insurance coverage as incurred on the:
- First day of each month of coverage on a pro rata basis,
- First day of the period of coverage, or
- Date the premium is paid.
For example, a Health Reimbursement Arrangement providing individual coverage for a calendar year may immediately reimburse a substantiated premium for health insurance coverage that begins on January 1 of that plan year. This holds true even if the covered individual paid the coverage premium before the first day of the plan year
Some relief
Although these changes aren’t directly related to the coronavirus (COVID-19) pandemic, they may provide some relief to employees dealing with medical expenses. Contact us for further information.