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To quickly review, a cafeteria plan is an employer-sponsored fringe benefit plan that provides employees with the opportunity to choose from at least one cash benefit and one qualified benefit.
Qualified benefits are offered on a pre-tax basis, and include the following:
The IRS provisions impacted several aspects of cafeteria plans. However, these changes aren’t mandatory for employers, and companies can place restrictions on changes they choose to accept. So, as an employee participating in a plan, check with your organization to see if any of the changes described below were adopted by your company, or may be implemented later.
Normally, you must make any elections for qualified benefits before the plan year starts. But you’re also typically allowed—if your employer agrees to it—to make a mid-year change when you experience a “qualifying life event” which is defined as a loss of health coverage, change in marital status or change in dependent status. If you don’t experience any of these life events, you need to wait until the next open enrollment window to alter your plan.
However, for the calendar year 2020, the IRS is temporarily waiving the qualifying life event requirement allowing you to modify elections to your health plan or FSA for any reason.
You may have the ability to join a plan that you initially declined, modify your current election or drop your plan coverage at any point this year.
You may now temporarily increase, decrease or revoke any existing elections to FSAs and DCAPs, or even make a new election.
Additionally, most health FSAs and DCAPs follow a “use-it-or-lose-it” rule. But cafeteria plans sometimes feature either a carryover or grace period option.
A carryover enables you to take advantage of any unused health FSA funds from the previous year (up to a specified amount) in the following plan year. Meanwhile, a grace period allows you to apply unused health FSA or DCAP funds to pay expenses incurred in the first two months and 15 days following the end of a plan year.
The IRS also implemented a permanent change to health FSA carryovers. Beginning in plan year 2021, the carryover amount will be indexed each year at 20% of the maximum health FSA pre-tax contribution. For 2021, the carryover increases from $500 to $550.
Some of the rule changes came with caveats. For instance, let’s say you have a general-purpose healthcare FSA with a grace period and had a balance in your account at the end of the year. You decide to move to a high-deductible plan during 2020. If your organization has extended the grace period until December 31, 2020 under the new rules, you can’t make any HSA contributions this year.
Also, if you switch your coverage, it may mean you’ll need to start over with your deductible. In other words, any amount you’ve applied towards your deductible on your previous plan might not be applied to your new coverage.
Do you have vision or dental coverage? At the moment, it’s not clear if the rule changes apply to these benefits. Consult with your organization as the year progresses for any updates.
Any modifications adopted by your organization must be made by December 31, 2021. But, the changes will be retroactive to January 1, 2020 no matter when they’re implemented.
As an employer, you can decide whether to adopt any of the changes made by the IRS, and you also may place restrictions on those you implement—as long as they comply with the Section 125 non-discrimination rules. Before making any changes, it’s advisable to conduct a careful review of your employee population to determine their current needs.
While incorporating changes may create additional administration responsibilities and costs, doing so can demonstrate good stewardship as an employer. You’ll be giving employees some needed flexibility during a time of uncertainty, especially with FSA accounts that may now be under- or over-funded because of the pandemic fallout.
However, providing employees with more freedom might lead to unanticipated consequences. For example, it could result in adverse selection, with healthier workers opting out or reducing their coverage while less-healthy ones maximize their coverage. To avoid this, you might restrict the types and number of changes permitted—such as only allowing a switch from single to family coverage, or from a low-deductible to a high-deductible plan.
Don’t forget to communicate any potential changes to your plan providers, too. As an example, consult with your insurance or stop-loss carriers to see if they’ll object to or place limits on any modifications an employee may make to their plan.
Other possible tips or suggestions you should consider:
No matter if you’re an employee or employer, the rule changes give you plenty to think about.
As an employee, are you curious how these changes affect your financial plan? Contact your Ayco advisor for help maximizing the financial opportunities from your compensation and benefits. If you’re unsure whether your company offers Ayco Financial Counseling, please talk to your human resources representative.
Employers who work with Ayco have regular access to our thought leadership from specialists in benefits, compensation and other areas. Contact us to see how Ayco can help your team.
For disclosures relating to this article, please click here.
Insights from Ayco InnerCircle 2021
By Brandon Ross