Updated May 15, 2020 with new IRS guidance (Notice 2020-29 issued on May 12, 2020 in response to COVID-19) that relaxes mid-year election rules during the 2020 calendar year.
Employees may be wondering if they can change their benefit elections in response to the coronavirus (COVID-19) public health emergency. Below I review when employees can make certain election changes to their medical plans, healthcare flexible spending accounts (FSAs), dependent care FSAs, pre-tax commuter benefits, and health savings accounts (HSAs).
Changes to Healthcare Elections: Medical Plans and Healthcare FSAs
Most employers offer their medical plans (medical, dental, vision) and health FSAs through an IRS Section 125 Cafeteria Plan, which allows employees to receive benefits on a pre-tax basis. Employee elections are irrevocable (i.e. cannot be changed) unless a permitted status change event occurs allowing them to make changes. Permitted status change events, often referred to as “qualified life events” or “QLEs,” include the specific events outlined under the associated Section 125 regulations. Furthermore, if a permitted event occurs under Section 125, any changes made by employees must be consistent with and on account of the event.
Further, employers must adopt all of the “HIPAA special enrollment rights,” under the Health Insurance Portability and Accountability Act (HIPAA), which are mandatory events that group health plans must allow. On the other hand, employers have the “option” of adopting all, or some, of the Section 125 “permitted” status change events.
The mandatory HIPAA special enrollment rights include:
- Employee or their dependent loses eligibility for other coverage;
- Addition of a spouse or dependent due to marriage, birth, adoption, or placement for adoption; and
- Losing or gaining eligibility for state Children’s Health Insurance Program (CHIP) or Medicaid, or gaining eligibility for premium assistance under these programs.
Thus, employees are permitted to make mid-year changes to their pre-tax elections only if (1) it is a HIPAA special enrollment right or if it is allowed under the employer’s Cafeteria Plan and (2) if the change is consistent with and on account of the event that occurred. Below, we discuss the various “qualified life events” in further detail due to COVID-19 that may allow employees to enroll or make mid-year changes to their healthcare plans.
Special COVID-19 Rules pursuant to IRS Notice 2020-29: On May 12, 2020, the IRS issued Notice 2020-29, which gives employers the option to allow their employees to make certain mid-year changes during the 2020 calendar year, regardless of whether a Section 125 “qualified life event” occurs (the permissive changes are outlined below under #8 of this section). Employers who want to allow for these mid-year changes must amend their Cafeteria Plan documents and notify their employees of the changes. Employers should also check with their carrier (if fully-insured) or their stop loss provider (if self-insured) to determine whether these mid-year changes will be allowed by their plans. For additional information on the new IRS guidance, see our blog article.
1. Gaining Eligibility for Employer-Provided Benefits
With carrier approval, employers may change the eligibility requirements under their healthcare plans so that more employees are eligible. If employees become eligible, they can elect healthcare benefits and make elections to a healthcare FSA.
2. Employer-Sponsored Plan COVID-19 Special Enrollment Period
In response to COVID-19, some insurance carriers are allowing for a short special enrollment period (SEP) that would allow employees and/or their dependents who previously declined coverage to enroll mid-year onto employer-sponsored healthcare plans. Employers can, but are not required to, allow for this SEP.
Since a public health emergency (such as COVID-19) is not a permissible QLE that allows for a mid-year change under Section 125, employees who do enroll during this SEP may not be able to pay for their premiums on a pre-tax basis. Employers should be aware of this tax issue if they do allow for a mid-year SEP and may want to discuss any tax risk with legal counsel of their tax professional.
Special COVID-19 Rules pursuant to IRS Notice 2020-29: On May 12, 2020, the IRS issued Notice 2020-29, which gives employers the option to allow their employees who previously declined coverage to enroll mid-year (such as during a COVID-19 SEP) during the 2020 calendar year. Employees who enroll during this SEP would be able to pay for their coverage on a pre-tax basis. In order to allow for this mid-year enrollment, employers must amend their Cafeteria Plan documents accordingly and notify their employees of the changes.
If an employer already permitted a COVID-19 SEP prior to the date IRS Notice 2020-29 was released (May 12, 2020), employers can retroactively amend their Cafeteria Plan back to the date of the special enrollment (or January 1, 2020 at the earliest). This retroactive amendment would mean that enrollments that were made during the COVID-19 SEP were consistent with the employer’s Cafeteria Plan and allow employees who elected coverage during that time to pay for their healthcare on a pre-tax basis.
3. Marketplace Special COVID-19 Open Enrollment Period (SEP)
Eleven states (California, Colorado, Connecticut, Maryland, Massachusetts, Minnesota, Nevada, New York, Rhode Island, Vermont and Washington) and the District of Columbia have opened a SEP under their state-run Marketplace healthcare exchanges due to COVID-19. Employer Cafeteria Plans can allow employees to revoke their employer-sponsored health coverage (but not their healthcare FSA) to enroll onto a qualified health plan through the Marketplace during a SEP. If permitted by an employer’s Cafeteria Plan, employees can drop their employer-sponsored coverage if they intend to immediately enroll in coverage through the Exchange. For more on this QLE, see the IRS guidance.
Idaho and the 38 states with Marketplaces run by the federal government have decided not to open up a similar special open enrollment period; however, individuals who lose their employer-sponsored coverage will have the right to enroll onto Marketplace plans upon providing proof of losing employer coverage.
Special COVID-19 Rules pursuant to IRS Notice 2020-29: IRS Notice 2020-29 gives employers the option to allow their employees to drop healthcare coverage in order to enroll in other coverage not sponsored by the employer (such as coverage through the Marketplace) during the 2020 calendar year. In order to drop coverage, employees must attest in writing that they are enrolled in, or will immediately enroll in, other coverage. IRS Notice 2020-29 provided a sample attestation that employers can use to obtain this attestation. Employers who want to allow their employees to do this must amend their Cafeteria Plan documents accordingly and notify their employees of this allowance.
4. Significant Changes to Cost
Employers may be looking to increase or decrease employer contributions to employees’ healthcare premiums in response to the COVID-19 outbreak. Employees may be able to change their healthcare elections if the change in contributions causes a significant change in cost to their healthcare premiums, as long as a “significant change in cost” is a permitted QLE under their employer’s Cafeteria Plan.
Further, employers have the discretion to decide whether a “significant change in cost” has occurred that would allow employees to change their elections. If this the case, then employees have the option to change their healthcare election (but not their healthcare FSA election) in a manner consistent with the event.
- Significant increase in cost: Employees will be able to drop healthcare coverage or switch to a cheaper plan.
- Significant decrease in cost: Employees will be able to enroll in healthcare coverage, switch from employee-only to family coverage, switch to a more expensive plan, or any combination thereof.
Important Note on Reduction in Salary: Some employers may be cutting employee salaries in response to the economic downturn caused by COVID-19. A reduction in salary, in and of itself, is not a QLE that would allow employees to drop or change their healthcare elections. For more on employer benefit options in response to COVID-19, see our blog.
5. Change in Employment Status: Reduction in Hours, Furloughs and Lay Offs
A Change in Employment Results in Loss of Eligibility
Employers may be reducing hours or laying off employees due to the economic hardship caused by COVID-19. Employees are permitted to change their elections if a change in their employment status (reduction in hours, furlough, or termination) results in the loss of eligibility under the plan. This change would likely occur automatically, as employees would lose coverage once they lose eligibility.
A Reduction in Hours that Does Not Cause a Loss of Eligibility
A Cafeteria Plan may allow employees to revoke health plan coverage (but not necessarily their healthcare FSA) if a change in employment status causes them to no longer work an average of 30 hours per week, even if this change does not result in a loss of eligibility. In order for an employee to revoke coverage, the employee must have dropped below 30 hours per week and must also intend to enroll in other coverage no later than the second month following the revocation. In addition, the employer’s Cafeteria Plan document must have adopted this particular status change event.
A healthcare FSA may also permit employees to revoke their healthcare FSA coverage under this situation, but only if this particular status change event is adopted in the employer’s FSA summary plan description (SPD).
A change in employment status that does not result in a loss of eligibility may be occurring if employers are changing their eligibility rules (with carrier approval) so that employees who reduce their hours still remain eligible for benefits. It appears that this particular permitted status change event was drafted to allow employees who maintained coverage during a look back “stability period” to be able to revoke coverage and enroll in the Exchange or their spouse’s plan when they dropped work hours/salary. While not completely on point, some employers who have adopted this QLE within their Cafeteria Plan may determine that these are substantially similar circumstances that would allow an employee to revoke coverage. Employers who allow this status change event may want employees to confirm they will be enrolling in other coverage in writing. For more on this QLE, see the IRS guidance.
Special COVID-19 Rules pursuant to IRS Notice 2020-29: IRS Notice 2020-29 gives employers the option to allow their employees to drop healthcare coverage during the 2020 calendar year if employees provide an attestation that they will enroll in other coverage. For instance, an employee whose hours are reduced (but who is still covered under their employer’s plan) may want to drop coverage in order to enroll in other coverage (e.g. their spouse’s coverage or coverage through the Marketplace). Employers who want to allow their employees to do this must amend their Cafeteria Plan documents accordingly and notify their employees of this allowance.
6. Change in Spouse or Dependent’s Employment that Causes a Loss of Healthcare
An employee’s spouse or dependent may lose their healthcare coverage as a result of having their hours reduced or being laid off. Under HIPAA special enrollment rights, an employee can enroll their spouse and/or dependents onto their employer-sponsored healthcare plan if:
- Their spouse and/or dependents lose eligibility under their healthcare plan (for instance, due to a layoff or furlough, but not due to the non-payment of premiums);
- Are eligible for coverage under the employee’s plan (be sure to check the plan’s eligibility for dependents); and
- Their spouse and/or dependents previously declined coverage because they were enrolled in other coverage.
In addition, the employee may enroll in a healthcare FSA or increase their healthcare FSA election under these circumstances.
7. Special Rules for Employees Taking Federal FMLA Leave
Employees may be eligible to take leave under the Federal and Medical Leave Act (FMLA) for up to 12 weeks to care for themselves if they are diagnosed with COVID-19 (and they are unable to perform the essential functions of their job) or to care for their spouse, child, or parent who is diagnosed with COVID-19. Generally, employers must provide healthcare continuation to employees utilizing FMLA leave under the same terms and conditions as if the employee had not taken leave.
In addition, employees taking unpaid FMLA leave have special rights to change their elections:
- Employees can revoke healthcare coverage and/or healthcare FSA coverage during the FMLA leave (and have the right to benefit reinstatement once they return from leave).
- Employees may continue healthcare coverage and/or healthcare FSA coverage during the FMLA leave. Employers should determine what their policy will be regarding how employees will pay for premiums while they are on leave. The employer can allow employees to pre-pay for premiums with the employee’s consent, pay while they are on leave, or pay once they return.
- Employees have the right to make any permissible mid-year election changes while they are on FMLA leave.
When employees return from FMLA leave, employers must resume healthcare benefits in the same manner and level as provided before the leave began.
Failure to Return from FMLA Leave
If an employee does not return to work after their FMLA leave as planned, or remains on unprotected leave, then the employer is not required to continue their healthcare benefits (absent any employer policy or agreement). The employer must offer the employee COBRA benefits continuation coverage once the employee loses coverage.
Failure to Pay Premiums
If the employee fails to pay their share of benefit premiums while they are on FMLA leave, the employer has the option of covering the employee’s share of the premiums during the leave and recovering the amounts after the end of the leave. The employer also has the option of ceasing their benefits if an employee’s premium is more than 30 days late (or later than the grace period established by the employer’s policies) and they give the employee a written notice that their payments were not received at least 15 days before ceasing their benefits. The notice must advise the employee that their coverage will be dropped on a specified date at least 15 days after the date of the notice if the payments are not received.
If the employer ceases an employee’s benefits for the nonpayment of premiums and the employee fails to return from the leave, a COBRA qualifying event occurs on the last day of the FMLA leave and the employer is required to offer COBRA continuation coverage at that time.
“Emergency FMLA” related to COVID-19
Please note that Congress recently passed the Families First Coronavirus Response Act (FFCRA) which requires employers with less than 500 employees to provide emergency FMLA leave for eligible employees who are unable to work (or telework) to care for a child (under the age of 18) due to school or childcare closure as a result of COVID-19. For more on FFRCA, see our blog.
8. Special COVID-19 Rules Pursuant IRS Notice 2020-29
On May 12, 2020, the IRS released Notice 2020-29, which allows employers to amend their Cafeteria Plan documents to permit employees to prospectively change their elections or enroll mid-year, even if a Section 125 qualified life event did not occur. For employer-sponsored group health plans and health FSAs, employers may permit the following during the 2020 calendar year:
- Employees who previously declined employer-sponsored coverage can enroll in coverage during a special COVID-19 enrollment period, if offered by their employer and permitted by the employer’s insurance carriers.
- Employees can revoke an existing election and make a new election to enroll in a different health coverage. This would permit employees to switch employer-sponsored plans or switch from self-only coverage to family coverage on a prospective basis.
- Revoke employer-sponsored coverage, though only if the employee attests in writing that they are enrolled in or plan to immediately enroll in other health coverage. This would allow employees to drop their employer’s healthcare coverage to enroll in other healthcare coverage (e.g. their spouse’s coverage).
- Revoke an election, make a new election, or change an existing election to health FSAs and DC FSAs.
Employers who allow for these mid-year election changes may determine when such election changes are permitted and applied. Employers should check with their carrier (if fully insured) or their stop-loss carrier (if self-insured) to determine whether these mid-year changes will be permitted. In order to permit these changes employers must amend their Cafeteria Plan documents and notify their employees of the changes. For additional information on the new IRS guidance, see our blog article.
Dependent Care Flexible Spending Accounts (DC FSA)
As a response to the COVID-19 outbreak, schools and daycare facilities in many parts of the country have been closing. This has forced parents to look for alternative childcare, causing an unanticipated increase in childcare costs. At the same time, some parents are being asked to work from home, which eliminates some parents’ need to pay for childcare, causing an unanticipated decrease in childcare costs. As a result, employees may ask to change their DC FSA elections.
Generally, employees can make changes to their DC FSA if there is a change in cost or coverage. The IRS has indicated that the rules surrounding permitted election changes to DC FSAs are intended to be liberally interpreted. While an emergency health pandemic (such as COVID-19) is not considered a QLE that allows participants to make a mid-year election change, a change in the cost of childcare or a change in an employee’s or their spouse’s work schedule is a permitted change event. Thus, if COVID-19 has changed an employee’s childcare costs, the employer may allow employees to increase or decrease their DC FSA elections accordingly.
Employers should check with their DC FSA vendor to determine what documentation is required to make election changes. The vendor will likely require documentation of the change in cost (such as a school or childcare center closure or a parent’s work from home status) to justify the change, as documentation is usually required for all childcare expenses that are reimbursed through the DC FSA.
Special COVID-19 Rules pursuant to IRS Notice 2020-29: Employers can amend their DC FSA plan documents to allow employees to revoke their election, make a new election, or increase/decrease their existing election during the 2020 calendar year (regardless if they have a change in cost or coverage). Employers have wide discretion to determine when and under what circumstances employees can change their DC FSA elections. To do this, employers must amend their Cafeteria Plan documents and notify their employees of the changes. For additional information, see our blog post.
Employee and Spouse Must be “Gainfully Employed”
As a reminder, DC FSA expenses must be incurred to enable an employee and their spouse to work (either full time or part time) or look for work, in other words “to be gainfully employed.” In general, whether an individual is “gainfully employed” is determined on a daily basis. However, IRS regulations do allow for an exception from the “gainfully employed” requirement for short temporary absences from work (such as for a vacation or a short illness) when employees still need to pay for care during the absence. Under the IRS regulations, a short temporary absence is considered 2 consecutive weeks, or potentially longer based on the facts in circumstances.
This means that employees who are furloughed and are not working for a short time period can potentially still reimburse eligible childcare costs from their DC FSA, if necessary. If the absence is prolonged, the employee may lose their ability to reimburse expenses.
Health Savings Accounts (HSAs)
Employees can change their HSA elections on a prospective basis. HSAs must allow changes on at least a monthly basis, but plans can allow for changes more frequently. Thus, employees should check their plan documents to determine how soon they can make any needed HSA election changes.
Employees cannot use their HSA to pay for insurance premiums unless the premiums are for:
- Long-term care insurance;
- Health care continuation coverage (such as coverage under COBRA);
- Health care coverage while receiving unemployment compensation under federal or state law; or
- Medicare and other health coverage if you were 65 or older (other than premiums for a Medicare supplemental policy, such as Medigap).
It is important to note that the IRS has extended the deadline for employees to make 2019 contributions to their HSA accounts to July 15, 2020. This means that employees who have not contributed up to their 2019 IRS limit have additional time to do so. For more on the HSA deadline extension, see our blog here.
Since many employees are now working from home (either voluntarily or due to a mandatory shelter in place) and no longer commuting to the office, employees may want to stop their pre-tax payroll deductions towards commuter benefits.
Employees can change their pre-tax commuter benefit elections on a prospective basis prior to any applicable salary reduction. Once a salary deduction for transportation benefits takes place, employees cannot get these amounts back in cash; however, most commuter benefit plans will permit employees to carry over unused amounts as long as they remained employed by their employer.
Employers should review their plan documents or contact any commuter benefit vendor to determine when employees must make their benefit election changes. Most commuter benefit programs permit employees to change their elections on a monthly basis.
- Medical Plans and Healthcare FSAs: Employees may be able to make changes to their healthcare elections and healthcare FSAs if a permitted status change event occurs and if the event is a HIPAA special enrollment event or allowed under their employer’s Cafeteria Plan. Employee’s changes must be consistent with the event.
- Special COVID-19 Rules: Employers also have the option of allowing employees to make certain mid-year changes during the 2020 calendar year pursuant to IRS Notice 2020-29, if employers amend their Cafeteria Plan documents accordingly and notify their employees of the changes.
- Dependent Care FSAs: Employees can make changes to their dependent care FSA elections if they experience a change in cost to their childcare expenses or a change in their work schedule. Employees should anticipate providing documentation to their DC FSA vendor to substantiate the election change.
- Special COVID-19 Rules: Employers also have the option of allowing employees to revoke their DC FSA election, make a DC FSA election, or change an existing DC FSA election during the 2020 calendar year pursuant IRS Notice 2020-29, if employers amend their Cafeteria Plan documents accordingly and notify their employees of the changes.
- HSAs: Employees can make changes to their HSA on a prospective basis. Employees are allowed to make changes at least on a monthly basis but should review their HSA plan documents to determine whether there are any applicable deadlines to make changes.
- Commuter Benefits: Employees can make changes to their pre-tax elections for commuter benefits on a prospective basis and should ensure any changes are made before deductions are taken from their paychecks.
- Employers Can Now Permit Mid-Year Election Changes and Claim Extensions due to COVID-19
- IRS Notice 2020-29: COVID-19 Guidance Under Section 125 Cafeteria Plans
- Employer Benefit Options in Response to COVID-19
- Families First Coronavirus Response Act Takes Effect April 1st
- The Coronavirus Aid, Relief and Economic Security (CARES) Act
- IRS Guidance on Permitted Election Changes for Marketplace Enrollment and Reduction in Hours
The information and materials on this blog are provided for informational purposes only and are not intended to constitute legal or tax advice. Information provided in this blog may not reflect the most current legal developments and may vary by jurisdiction. The content on this blog is for general informational purposes only and does not apply to any particular facts or circumstances. The use of this blog does not in any way establish an attorney-client relationship, nor should any such relationship be implied, and the contents do not constitute legal or tax advice. If you require legal or tax advice, please consult with a licensed attorney or tax professional in your jurisdiction. The contributing authors expressly disclaim all liability to any persons or entities with respect to any action or inaction based on the contents of this blog.