IRS Provides Relief for Certain Cafeteria Plan Rules During 2020 and Indexes the $500 Carryover Amount for Flexible Spending Accounts

On May 12, 2020, the IRS issued two notices that allow employers to ease certain restrictions that apply to cafeteria plans, health care flexible spending accounts (Health FSAs), dependent care spending accounts (DCFSAs), and high deductible health plans (HDHPs), and to increase the FSA carryover amount. This alert describes the permitted changes.

Notice 2020-29 generally allows a plan amendment to permit mid-year changes in elections during 2020, extend the end date of the permitted grace period under a Health FSA or DCFSA for using unused amounts from the 2019 plan year, and, for HDHPs, provide retroactive relief for telehealth services.

Notice 2020-33 generally increases from $500 to $550 the permitted carryover of unused amounts remaining as of the end of a plan year in a Health FSA and permits health plans to reimburse individual insurance policy premium expenses for the current plan year that are incurred prior to the beginning of the plan year.

Action Needed Now: Plan sponsors may want to immediately implement these new rules.  Corresponding amendments to plan documents can be retroactive but must be made by December 31, 2021.


Under the IRS regulations, except for certain changes in status or significant changes in the cost of coverage, cafeteria plan elections – such as health plan elections, Health FSA contributions, and DCFSA contributions – must be irrevocable and made prior to the first day of the plan year. In addition, Health FSAs and DCFSA are generally subject to a "use-or-lose" rule under which unused benefits or contributions remaining as of the end of the plan year are forfeited. For unused amounts as of the end of the year, the IRS permits a cafeteria plan to use one of two exceptions (but not both) to the “use-or-lose” rule:

  • A grace period of up to 2½ months immediately following the end of the plan year in which participants may use any previously unused amounts (See Notice 2005-42.) or
  • A "permissive carryover" of up to $500, to the following year. (See Notice 2013-71.) This provision applies only to Health FSAs, not DCFSAs.

 Detailed Description of Changes

 Notice 2020-29

  • Mid-Year Election Changes: Notice 2020-29 allows cafeteria plans to permit employees to make the mid-year election changes listed below during the 2020 plan year. This includes enrolling if the employee previously declined, changing health coverage options, or disenrolling. (If the employee is disenrolling from all employer sponsored coverage, the employee must attest that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer.) The same options may also be applied to Health FSAs and DCFSAs as well as health coverage.
  • Extension of 2½ Month Grace Period: For unused amounts remaining in a Health FSA or a DCFSA as of the end of a grace period ending in 2020, a cafeteria plan may permit employees to apply those unused amounts to pay or reimburse medical care expenses or dependent care expenses, respectively, incurred through December 31, 2020. For example, a plan with a calendar year plan year and a grace period ending March 15, 2020, the grace period may be extended to the end of the calendar year 2020. 
  • Extended Claims Period for Plans With Permissible Carryover: A plan with a plan year ending in 2020 that has a carryover may provide that all unused amounts in a Health FSA at the end of the plan year may be applied to claims incurred after the end of the plan year through December 31, 2020. In essence, for a calendar plan year this is unlimited carryover from 2019 to 2020. For a plan year that is not a calendar year, Notice 2020-29 will allow a special grace period for a Health FSA through the end of 2020 in addition to the carryover. This is an exception only for 2020 from the prohibition of having both a carryover and a grace period.
  • Clarification of HDHP Relief: The Notice clarifies that expenses related to testing for and treatment of COVID-19 as preventive care1 applies with respect to reimbursements of expenses incurred on or after January 1, 2020. It further clarifies that the panel of diagnostic testing for influenza A&B, norovirus and other coronaviruses, and respiratory syncytial virus (RSV), are part of testing and treatment for COVID-19 and thus can be covered prior to satisfying the deductible. The Notice also provides that telehealth visits can be covered before the deductible is satisfied under a HDHP.
  • Plan Amendments: These changes can be implemented immediately rather than waiting until a plan amendment is adopted. Plan amendments to reflect changes pursuant to Notice 2020-29 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 timely informed all individuals eligible to participate in the cafeteria plan of the changes to the plan.

Notice 2020-33

  • FSA Carryover Amounts: Notice 2020-33, indexes the maximum $500 carryover amount under a Health FSA for inflation by an amount equal to 20 percent of the maximum allowable salary reduction contribution for that plan year so that it operates in parallel with the indexing of the maximum permitted contribution to a FSA.2 The increases to the maximum carryover will be in multiples of $10. Accordingly, the maximum unused amount from 2020 that may be carried over to 2021 is $550. A cafeteria plan that implements this increase for 2021, must be amended to reflect this increase in the carryover limit on or before the last day of the 2021 plan year.
  • Timing for Reimbursements for Individual Health Plans: Generally, to qualify for exclusion from income and wages under sections 105 and 106, a health plan may not reimburse medical care expenses incurred before the beginning of the plan year. Notice 2020-33 provides that health plans, such as an individual coverage HRA, are permitted to reimburse premiums for health insurance coverage as incurred on one of the following dates:
    • the first day of each month of coverage on a pro rata basis,
    • the first day of the period of coverage, or
    • the date the premium is paid.

Thus, for example, an individual coverage HRA with a calendar year plan year may immediately reimburse a substantiated premium for individual health insurance coverage that begins on January 1 of that plan year, even if the covered individual paid the premium for the coverage prior to the first day of the plan year.

 CHEIRON OBSERVATION – The Notices allow, but do not require, sponsoring employers to provide the liberalizations they contain. Employers may want to word their amendment so as not to allow employees who have already spent their FSA money to eliminate their payroll deduction via a mid-year election.

 Cheiron consultants can assist with your preparation of the SBC for your plan.

 Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Accordingly, we do not provide legal services or tax advice.

1 Generally, HDHPs are not permitted to provide coverage for services other than preventive care prior to the satisfaction of the applicable minimum deductible. Previous relief (Notice 2020-15) provides that a health plan allowed for testing for and treatment of COVID-19 prior to the satisfaction of the applicable minimum deductible. Section 3701 of the CARES Act (relating to coverage for telehealth services for patients who may have COVID-19) permits HDHPs to provide such coverage prior to the satisfaction of the applicable minimum deductible and may be applied retroactively to January 1, 2020.

2 When Notice 2013-71 was issued, $500 represented 20 percent of $2,500, the maximum allowed salary reduction permitted for 2013. While Notice 2013-71 indexed the $2,500 amount for inflation, that notice did not provide for a corresponding adjustment to the $500 carryover amount.