|
IRS Provides Additional COVID-19 Relief Guidance for Cafeteria Plans
(Parker Tax Publishing February 2021)
The IRS issued guidance that clarifies the application of Section 214 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the Act), which temporarily increases flexibility for a Code Sec. 125 cafeteria plan to provide a carryover of unused amounts remaining in a health flexible spending arrangement (health FSA) or dependent care assistance program to pay or reimburse medical care expenses or dependent care expenses in a subsequent plan year. The guidance provides that the carryover is available to cafeteria plans that currently have a grace period or provide for a carryover, as well as plans that currently do not have a grace period or provide for a carryover, notwithstanding Notice 2013-71, which otherwise continues in effect and provides that health FSAs can either adopt a grace period or provide for a carryover amount but cannot have both. Notice 2021-15.
Background
A Code Sec. 125 cafeteria plan is a written plan maintained by an employer under which all participants are employees, and all participants may choose among two or more benefits consisting of cash and qualified benefits. Subject to certain exceptions, Code Sec. 125(f) defines a qualified benefit as any benefit which is not includable in the gross income of the employee by reason of an express provision of the Code. Qualified benefits that may be provided under a Code Sec. 125 cafeteria plan include, but are not limited to, employer-provided accident and health plans excludable under Code Sec. 105(b) and Code Sec. 106, health flexible spending arrangements (health FSAs) excludable under Code Sec. 105(b) and Code Sec. 106, and dependent care assistance programs excludable under Code Sec. 129. Code Sec. 223 permits eligible individuals to establish and contribute to health savings accounts (HSAs). Coverage by a general purpose health FSA disqualifies an otherwise eligible individual from contributing to an HSA, although coverage by an HSA-compatible health FSA, such as a limited purpose health FSA or a post-deductible health FSA, would not do so.
Elections regarding qualified benefits under Code Sec. 125 cafeteria plans generally must be irrevocable. A Code Sec. 125 cafeteria plan may permit the carryover of unused amounts remaining in a health FSA as of the end of a plan year to pay or reimburse a participant for medical care expenses incurred during the following plan year, subject to the carryover limit (the carryover rule). In the alternative, a Code Sec. 125 cafeteria plan may permit a participant to apply unused amounts (including amounts remaining in a health FSA or dependent care assistance program) at the end of the plan year to pay expenses incurred for those same qualified benefits during a period of up to two months and 15 days immediately following the end of the plan year (the grace period rule). For a health FSA, a Code Sec. 125 cafeteria plan may adopt a carryover or a grace period (or neither) but may not adopt both features. Generally, a Code Sec. 125 cafeteria plan may not adopt a carryover for a dependent care assistance program.
In Notice 2020-29, the IRS explained that, due to the nature of the COVID-19 public health emergency and 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 at the end of plan years, or grace periods, ending in 2020. To provide related relief, Notice 2020-29 extended, to the end of calendar year 2020, the period during which employees could be permitted to apply unused health FSA amounts and dependent care assistance program amounts remaining as of the end of a grace period or plan year ending in 2020 to pay or reimburse medical care expenses or dependent care expenses.
Section 214 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the Act) was enacted as part of the Consolidated Appropriations Act, 2021 (Pub. L. 116-260). Specifically, Section 214 (1) provides flexibility with respect to carryovers of unused amounts from the 2020 and 2021 plan years; (2) extends the permissible period for incurring claims for plan years ending in 2020 and 2021; (3) provides a special rule regarding post-termination reimbursements from health FSAs during plan years 2020 and 2021; (4) provides a special claims period and carryover rule for dependent care assistance programs when a dependent "ages out" during the COVID-19 public health emergency; and (5) allows certain mid-year election changes for health FSAs and dependent care assistance programs for plan years ending in 2021. Section 214(c)(1) of the Act provides that a plan that includes a health FSA or dependent care assistance program will not fail to be treated as a cafeteria plan merely because the plan or arrangement extends the grace period for a plan year ending in 2020 or 2021 to 12 months after the end of that plan year, with respect to unused benefits or contributions remaining in a health FSA or a dependent care assistance program.
Notice 2021-15
Last week, the IRS issued Notice 2021-15, which provides guidance relating to Section 214 of the Act. In Notice 2021-15, the IRS states that an employer, in its discretion, may amend one or more of its Code Sec. 125 cafeteria plans to provide a carryover of all or part of the unused amounts remaining in a health FSA or a dependent care assistance program as of the end of a plan year ending in 2020 or 2021 to the immediately subsequent plan year. For example, if an employer sponsored a calendar year Code Sec. 125 cafeteria plan in 2020 with a health FSA that provides for a $550 carryover, the employer may amend the plan to carry over the entire unused amount remaining in an employee's health FSA as of December 31, 2020, to the 2021 plan year (even if that amount exceeds $550).
The employer also may amend the plan to carry over the entire unused amount remaining in an employee's health FSA as of December 31, 2021, to the 2022 plan year. This relief applies to all health FSAs, including HSA-compatible health FSAs, and also applies to all dependent care assistance programs. However, health FSA amounts may be used only for medical care expenses, and dependent care assistance program amounts may be used only for dependent care expenses. The Section 214 carryover is available to Code Sec. 125 cafeteria plans that currently have a grace period or provide for a carryover, as well as plans that currently do not have a grace period or provide for a carryover, notwithstanding Notice 2013-71, which otherwise continues in effect and provides that health FSAs can either adopt a grace period or provide for a carryover amount but cannot have both. In addition, an employer may limit the carryover to an amount less than all unused amounts and may limit the carryover to apply only up to a specified date during the plan year.
For purposes of determining whether an eligible individual qualifies to make contributions to an HSA, the carryover of unused amounts to the 2021 plan year or the 2022 plan year is an extension of the coverage by a health plan that is not a high deductible health plan (except in the case of an HSA-compatible health FSA, such as a limited purpose health FSA). Therefore, an individual is not eligible to make contributions to an HSA during a month in which the individual participates in a general purpose health FSA to which unused amounts are carried over pursuant to Section 214 of the Act. Employers may also amend their plans to allow employees, on an employee-by-employee basis, to opt out of the carryover to preserve their HSA eligibility.
Also under Section 214, an employer, in its discretion, may amend one or more of its Code Sec. 125 cafeteria plans to permit employees to apply any unused amounts remaining in a health FSA or a dependent care assistance program as of the end of a plan year ending in 2020 or 2021 to reimburse expenses incurred for the same qualified benefit (medical care or dependent care) up to 12 months after the end of the plan year. For example, if an employer sponsored a calendar year Code Sec. 125 cafeteria plan in 2020 with a health FSA, the employer may amend the plan to permit employees to apply the entire unused amount remaining in their health FSAs as of December 31, 2020, to reimburse employees for medical care expenses incurred through December 31, 2021.
In Notice 2021-15, the IRS notes that, as a practical matter, in most cases the flexibility provided by the Section 214 carryover and the extension of grace periods under the Act provide the same relief, as both provisions allow all unused benefits remaining for plan years ending in 2020 and 2021 to be made available for the same benefit (medical care expenses or dependent care expenses) incurred in the immediately subsequent plan year ending in 2021 and 2022, respectively. However, the relief available to employees may vary depending on whether an employer adopts either the extended grace period under Section 214(c)(1) of the Act or the Section 214 carryover, because the two types of relief interact differently with an extended period for incurring claims available under Section 214(c)(2). Additionally, the IRS stated, amounts carried over or available during an extended claims period will not be taken into account for purposes of the nondiscrimination rules applicable to Code Sec. 125 cafeteria plans and to dependent care assistance programs under Code Sec. 129. The otherwise applicable rules regarding carryovers and grace periods will apply for plan years ending in or after 2022.
For a discussion of benefits that may be offered under cafeteria plans, see Parker Tax ¶122,510.
Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.
Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com
We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.
Try Our Easy, Powerful Search Engine
A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play
Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.
Dear Tax Professional,
My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.
Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.
To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.
Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.
Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!
Sincerely,
James Levey
Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com
|
