IRS allows midyear changes to employee health plans

The Internal Revenue Service on Tuesday gave employers permission to let employees make midyear changes to their group health insurance coverage and to their flexible spending accounts for health care and dependent care for 2020.

Employer groups have been lobbying the IRS and Congress to allow more flexibility in these plans because the coronavirus has vastly changed people’s need for, and access to, health care and child care. The new guidance includes only some of the changes the groups recommended.

The new rules allow, but do not require, employers to make the following changes to their cafeteria plans:

Midyear changes to group health care: Normally employees can change their health care plan choices only during an annual openenrollment period, or midyear if they have specific lifechanging events. Under the new rules, employers — this year only — can let employees make midyear changes that would be in effect for the remainder of the year.

For example, they could let employees who declined coverage enroll in a plan, or change plans or add or drop family members. They could also drop group coverage entirely if they certify that they are enrolled or immediately will enroll in other comprehensive coverage.

This could be helpful, “especially if an employee had a significant salary reduction or was furloughed but still had health coverage” and wanted to switch from a highercost to a lowercost plan, said Anne Sanchez LaWer, an employment attorney with law firm Littler.

Midyear change to flexible spending arrangements: These accounts, better known as FSAs, let employees set aside a certain amount of

their salary before taxes in one account for health care and another for child care expenses. When employees incur the expense, they get reimbursed from the account, so they never owe tax on that money. The maximum contribution to flex accounts this year is $2,750 for health care and $5,000 for dependent care.

Normally, employees must decide before the plan year starts how much to set aside. After that, they can’t change the amount except for specified lifechanging events.

This year only, they can make midyear changes going forward for any reason, if the employer allows.

This is important because if employees set aside more than they spend in a year, they lose anything left in the account, unless the employer offers a grace period or carryover. Forfeited money goes to the employer.

Employees who have been setting aside money for orthodontia, elective surgery or routine health care may want to reduce their contribution if medical, dental and vision care remains hard to come by. If things open up, they can later increase the amount.

The new IRS guidance is less relevant for dependent care accounts because, under the old rules, parents usually could change their contribution midyear if their child care costs changed, perhaps because they no longer needed care or their daycare center closed.

Slightly higher carryover amount: There are two exceptions to the useitorlose it rule. For health care FSAs, employers can give employees a 21⁄2month “grace period” after the end of the plan year to spend remaining funds, or they can let workers carry over up to $500 from one year to the next. They can’t offer both options.

Starting this year, the carryover limit — which hasn’t changed since it was introduced — will be set at 20% of the maximum health care FSA contribution limit, which is indexed to inflation. That means that for 2020, employers can let employees carry over up to $550 into 2021.

Longer grace period for some plans: If your plan has a grace period that ends or ended this year, under the new rules your employer could give you until the end of 2020 to incur qualified expenses and get reimbursed from the account.

For example, if a calendaryear plan ended Dec. 31 had a grace period that ended March 15, and you forfeited money in the account, your employer may now allow you to spend the forfeited amount by the end of this year and get reimbursed.

If your plan year ends June 30, and has a grace period that ends July 15, you could have until Dec. 31 of this year to spend the money and get reimbursed from the account. Note this extended grace period ends this year. And your employer must allow it.

The American Benefits Council had asked the IRS for even greater flexibility this year, such as letting employees carry over more than $500 — perhaps up to their entire balance — into next year, extending the grace period from 21⁄2 months to six months, and letting terminated employees cash out their remaining balance. Under current rules they lose it.

Katy Johnson, the council’s senior counsel for health policy, said the changes announced Tuesday “are helpful for now. It remains to be seen whether it will be sufficiently helpful over the longterm.” The council “may ask IRS to revisit our recommendations.”

Liz Masson, a Hanson Bridgett attorney, said the changes “are not super employee friendly.” But she said she thinks most employers will adopt them. They can announce the change now, but have until the end of 2021 to formally amend their plans.

Recordlow student loan rates

Separately, interest rates on federal student loans will drop by 1.779% percentage points for new loans disbursed between July 1, 2020, and June 30, 2021.

The new interest rates will be 2.75% on undergraduate federal direct Stafford loans, 4.3% on graduate federal direct Stafford loans and 5.3% on federal direct Plus loans for graduate students and parents, according to Mark Kantrowitz, publisher of Savingforcollege.com. These rates are fixed for the life of the loan.

The previous recordlow rate on federal student loans was set in 2005, when interest rates were as low as 2.875%, he said.