The Internal Revenue Service issued guidance Tuesday to make temporary changes to section 125 cafeteria plans, with the goal of providing tax relief and flexibility in the midst of the novel coronavirus pandemic. The IRS is extending the claims period for health care flexible spending arrangements and dependent care assistance programs and enabling taxpayers to make mid-year changes to their accounts.
The guidance released Tuesday by the IRS deals with the unanticipated changes in expenses faced by many taxpayers as a result of the COVID-19 pandemic. The IRS is now allowing its previously provided temporary relief for high deductible health plans to be applied retroactively to Jan. 1, 2020, and also increases for inflation the $500 permitted carryover amount for health FSAs to $550.
Ran Harpaz is founder and CEO of Lettuce Financial, an AI-powered operating system built for solopreneurs.
Whitney Stidom is vice president of employer enablement at eHealth, a leading online health insurance marketplace that helps consumers confidently navigate their health benefit decisions.
Kim Johnson is the Senior Vice President of Customer at Hi Marley, where she leads the company's customer strategy and ensures that the carrier voice is embedded into the company's product and service offerings. With over 20 years of experience in the insurance industry, Kim has a proven track record in customer experience (CX) strategy, technology, and driving large-scale transformation initiatives. Prior to joining Hi Marley, Kim held senior leadership roles at Liberty Mutual Insurance, where she led CX strategy and managed software product development for servicing and claims. She also spent significant time at Allstate Insurance, working across Technology, Human Resources, and Claims. Kim began her career at Accenture, specializing in change management and consulting for financial services.
In Notice 2020-29, the IRS is offering extra flexibility to taxpayers by:
- extending the claims periods for taxpayers to apply unused amounts remaining in a health FSA or dependent care assistance program for expenses incurred for those same qualified benefits through Dec. 31, 2020;
- expanding the ability of taxpayers to make mid-year elections for health coverage, health FSAs and dependent care assistance programs, allowing them to respond to changes in needs as a result of the COVID-19 pandemic; and
- applying earlier relief for high-deductible health plans to cover expenses related to COVID-19, and a temporary exemption for telehealth services retroactively to Jan. 1, 2020.
In conjunction with that notice, the IRS also issued Notice 2020-33, in response to the Trump administration’s Executive Order 13877, which directs the Treasury secretary to “issue guidance to increase the amount of funds that can carry over without penalty at the end of the year for flexible spending arrangements.” The notice ups the limit for unused health FSA carryover amounts from $500, to a maximum of $550, adjusted each year for inflation.
