Can You Change Health Plans Mid Year

updated Jan. 4, 2021

The commodity below was last updated on June 10, 2020

Onorth May 12, the IRS released two notices allowing employees during 2020 to make changes to their enrollments in employer-sponsored health plans and to arrange pretax contributions to health flexible spending accounts (health FSAs) and dependent care flexible spending accounts (dependent care FSAs).

• Detect 2020-29 provides increased flexibility for participants to make midyear health program, wellness FSA and dependent care FSA election changes.
  

• Notice 2020-33 increases the carryover limit permitted for health FSAs.
  

These changes, which apply merely to plan twelvemonth 2020, had been advocated by the Society for Human Resource Direction (SHRM). The new guidance is permissive; employers are not required to make these plan changes.

Health Plan Enrollments and Elections

In IRS Notice 2020-29, the agency said information technology would allow increased flexibility regarding midyear election changes for group health plans and FSAs. Employers, at their discretion, may permit employees to brand either or both of these changes:

• Enroll in employer-sponsored health plans during the program year by making a new ballot. Employees may do then even if they had previously declined enrollment.
  

• Switch health plans or tiers within plans. Employees will be able to drop current coverage to enroll in different coverage offered past the same employer or change from unmarried coverage to family coverage, for instance.

"The IRS observe says that employers are not required to provide unlimited changes and the employer tin can set a timeframe to brand changes," said Chatrane Birbal, vice president, public policy, at SHRM.

Although allowing employees to make these newly permitted plan changes during 2020 is optional for employers, many "will desire to enable employees to enroll or revoke an enrollment ballot in diverse grouping health program options," noted Gary Kushner, president and CEO of Hr and benefits consulting firm Kushner & Company in Portage, Mich.

Difficult Times

While under existing Section 125 deli plan rules a change in the employment status of a spouse would exist a life event that allows a midyear election alter, the new guidance does not require that employees provide documentation of this, or that a requested election change be consistent with whatever change-in-condition event.

Julie Rock, North America co-leader for the health management practice at Hour consultancy Willis Towers Watson, noted that "from an enrollment/plan election perspective, I await there are many people where both partners/spouses were employed and opted to be covered under one plan potentially with children. If that parent loses employment, the toll of family COBRA is probable to be much more than costly than changing to the working spouse/parent's employer sponsored plan."

She added, "Given the unemployment and furlough rates, I recollect this is 1 of the most of import aspects of the new guidance."

David Speier, managing director for benefits accounts at Willis Towers Watson, said that assuasive midyear programme elections could mean that employees will "switch to a programme that increases the employer's fiscal burden during a difficult time," for example if employees opt for a depression-deductible plan with higher premiums paid by the employer, or shift from unmarried coverage to a more than expensive family unit plan. However, other midyear changes could reduce an employer's cost sharing, "as when employees elected a dental programme but now opt out considering they can't utilise information technology this year," Speier added.

FSA Enrollments and Elections

For both health FSAs and dependent care FSAs (used to fund caregiving expenses with pretax dollars), employers can permit employees enroll, drop coverage, and increase (inside the almanac limit) or decrease payroll-deducted contributions during 2020.

"This is welcome relief, and many employers will consider providing information technology under their plans," said William Sweetnam, legislative and technical director at the Employers Council on Flexible Bounty, which represents sponsors of account-based do good plans.

Stone explained, "At a fourth dimension where some people may be greenbacks-strapped, deferring elective procedures, new eyeglasses, etc., may well brand sense, and and then beingness able to append contributions to a health FSA or limited purpose dental/vision FSA is important."

Kushner blogged, "Many employers would comprehend enabling dependent care FSA participants to increase (or more likely decrease or revoke) their elections if schools and day care centers are closed, or if the employee is working from home."

However, for any FSA, "employers may exist more reluctant to enable employees to decrease or revoke their election if they've already claimed their previous full election corporeality and payments take been disbursed," he added.

In 2020, employees can contribute $2,750 to a health FSA, including to a limited-purpose FSA restricted to dental and vision intendance services, which can be used in tandem with a health savings account (HSA).

The dependent care FSA maximum, which is gear up by statute and non adjusted annually for inflation, is $5,000 a year for individuals or married couples filing jointly, or $2,500 for a married person filing separately, bailiwick to earned income limits.

[SHRM members-but forms: COVID-19 Midyear Ballot Change Testament]

FSA Use-Information technology-or-Lose-It Rules

Existing IRS rules provide an employer two options for unused health intendance FSA funds: A grace period into the new year during which employees tin can go along to spend FSA funds from the previous yr, and the ability to carryover over a limited amount of funds from the previous year. Employers tin choose to incorporate either the grace period or the carryover feature, or neither, but not both.

The new guidance changes the rules for both these provisions for program year 2020.

Grace Period Extension

IRS rules allow employers to add together a 2-and-one-half-calendar month grace catamenia immediately post-obit the end of each FSA plan year, during which wellness FSA holders could spend whatever funds remaining in the account. For agenda year health FSAs, the grace period ends March xv. The new guidance will extend the grace period to the end of 2020.

For plan years ending before December. 31, 2020, employers can amend a wellness or dependent care FSA programme to permit participants to "spend downwards" through yr-finish 2020 any remaining amounts from 2019 that would otherwise be forfeited. Employers tin allow claims incurred at any fourth dimension in 2020 to be applied to whatever remaining 2019 FSA balances.

Plan amendments that extend the claims period for health and dependent intendance FSAs may be constructive retroactively to Jan. ane, 2020. All eligible employees should be informed of the changes.

Increased Carryover Cap

IRS Notice 2020-33, also released May 12, increases the amount of funds that health FSA participants can carry over without penalty at the end of the yr for plans that utilize the carryover selection. The carryover amount will now be indexed for inflation by making it 20 percent of the allowable payroll-deductible contribution limit, which is $2,750 for programme year 2020.

Equally a consequence, the maximum unused amount from a plan yr starting in 2020 allowed to exist carried over to the immediately following program year beginning in 2021 is $550, upwardly from the previous limit of $500.

[SHRM members-only Hour Q&As: What options does an employer accept with unused FSA funds? ]

While Sweetnam chosen the aggrandizement adjustment helpful, he noted that many have advocated allowing much larger carryover amounts or eliminating the use-it-or-lose-it rule completely. "I think that the limited amount of the increase means that the IRS and Treasury Department were concerned that they did not have the authorization under the Internal Acquirement Code to provide for a larger carryover corporeality," he suggested.

Notice 2020-33 likewise clarified that the previously provided temporary relief for loftier-deductible health plans (permitting them to cover COVID-xix related services at no toll) may be applied retroactively to Jan. ane, 2020.

Different Plans Had Different Rules

Some midyear constituent-contribution changes have long been permitted. For instance, changes to payroll deductions to fund 401(k) or similar divers contribution retirement plans, HSAs, and commuter do good plans tin can be made at whatever time for whatsoever reason, although employers may limit changes for administrative purposes, such as to one time per month.

For employer-sponsored group health, dental and vision plans, however, changes are restricted. Under tax code Section 125, elective contributions typically tin exist changed only within 30 days of a qualifying upshot as determined by the IRS, such as marriage, divorce, chore change, birth or adoption of a child, or when a dependent child reaches age 26. The new guidance carves out an exception for changes fabricated during 2020 due to the COVID-19 pandemic.

HSA-Eligibility Problems

Sweetnam noted an issue with the new guidance that could complicate matters for employees who had a 2019 health FSA and were newly enrolled in an HSA in 2020: An employer that carries over unused funds from a prior year to a current year nether a general-purpose wellness FSA will not exist eligible for HSA contributions for the entire electric current program year.

"Carryover 2019 FSA amounts tin can exist used to pay for health care expenses below the deductible in 2020, thus making participants [with both carryover health FSAs and new HSAs] ineligible to make HSA contributions in 2020," Sweetnam said. "Consequently, employers may want to consider the impact on HSAs as they decide whether to extend the claims catamenia for health FSAs."

To avoid this outcome, employers can permit 2019 carryover health FSA funds to be transferred an HSA-uniform, limited-purpose FSA, which tin can exist used simply for vision care and dental expenses.

SHRM Advocacy

"As employers and their employees navigate the current crisis, workplace health intendance has emerged as a disquisitional issue requiring flexibility," Emily Grand. Dickens, SHRM corporate secretary, chief of staff and head of government affairs, wrote in an Apr xvi letter to IRS Commissioner Charles Rettig.

SHRM advocated flexibility on rollover provisions, time frames for claims, and midyear election changes to FSAs due to employees' evolving health care and child intendance needs as a issue of COVID-19.

SHRM too requested a old, pandemic-related window for employees who may have declined coverage at the start of the calendar yr to enroll in an employer's health plan, as the IRS is now allowing for 2020. "Many employers are struggling with employee requests for ballot changes and whether such a change would be permitted under IRS guidance," Dickens wrote.

In addition, SHRM asked the IRS to increase the almanac $500 carryover limit for health FSAs for plans that apply the carryover selection.

"Many employees … carefully contemplated a health care FSA election based on [elective] medical procedures that will no longer occur," Dickens pointed out, and these employees should not exist penalized because their anticipated annual medical expense estimates demand to be adjusted.

Update:

HR consultancy Mercer's COVID-nineteen survey, with responses through June ix from nearly 300 large U.S. employers, asked if they would "reopen" their health plans and FSAs for the 2020 programme twelvemonth to employees and their dependents, whether they currently participate or not, to make any type of midyear changes allowed by the IRS guidance.

Only nether half (47 percent) of the employers surveyed indicated they will allow some blazon of mid-year change, with the most popular being changing contributions to a dependent care FSA (43 pct) and changing contributions to health care FSA (29 percentage).

Fewer employers are planning to allow changes to medical programme elections, such as enrolling in a program after having waived coverage or calculation a dependent. Yet, approximately i in 10 say they volition allow these types of changes.

Source: Mercer COVID-19 survey, U.Southward. results equally of half dozen/9/2020 (279 respondents, more than one response allowed).

"Assuasive participants to modify their contributions to dependent care or health FSAs can be a relatively unproblematic way for employers to back up employees coping with COVID-xix related issues," said Jay Savan, a partner in Mercer'due south health business. "Maybe a child's summer camp is closed, or someone cancelled some planned dental work, or a spouse is out of work and the employee just needs more than money in their paycheck."

Savan said while there is very piffling downside in assuasive dependent care FSA changes, employers should exist mindful that in that location are some potential risks associated with assuasive changes to wellness FSAs. These risks include immediate employee access to full business relationship limits during a time when employers are hyper-focused on conserving greenbacks, as well equally the potential for employees to accelerate their use of health FSA funds and leave the plan in a deficit if they discontinue employment.

"Permitting enrollment changes midyear in cadre medical plans, still, brings with it much greater chance to the sponsor, such every bit incurring high cost claims and more often than not enabling adverse selection," Savan noted. "It tin also have collateral bear upon on finish-loss reinsurance and other related contracts."

He advised employers to counterbalance these risks before liberalizing the terms of midyear enrollment in medical plans in 2020.

Related SHRM Manufactures:

Appropriations Act Permits Midyear FSA Elections, Unlimited Carry-over Amounts Through 2021, SHRM Online, January 2021

SHRM Asks IRS for Relief with Health Plan Compliance During Pandemic, SHRM Online, Apr 2020

Special COVID-19 Health Insurance Enrollment Windows and Waivers, SHRM Online, March 2020

2020 FSA Contribution Cap Rises to $2,750, SHRM Online, November 2019

Can You Change Health Plans Mid Year,

Source: https://www.shrm.org/resourcesandtools/hr-topics/benefits/pages/irs-allows-mid-year-enrollment-and-election-changes-for-health-plans-and-fsas-coronavirus.aspx

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