The COVID-19 pandemic has changed the work environment in many ways, including a significant impact on employer-sponsored health benefits. The past year has resulted in changes to how frequently individuals visit the doctor (or do not visit the doctor), purchase eligible medical expenses, and need dependent care. In response to the pandemic, the IRS, Congress, the Department of Labor (“DOL”), and the Department of Treasury have provided options for employers to adopt flexible changes and extensions for employer-sponsored health coverage, health flexible spending accounts (“health FSAs”), dependent care assistance programs (“DCAPs”), and COBRA coverage. (See IRS Notice 2020-29; IRS Notice 2021-15; H.R. 1319 – American Rescue Plan Act of 2021; Employee Benefits Security Administration Disaster Relief Notice 2021-01.)
In order to help your agency track the available options and changes, here is a list of the top 9 ways COVID-19 can affect your public agency’s health benefits.
#1 Mid-Year Election Changes to Employer-Sponsored Health Coverage
An employer may amend a Section 125 cafeteria plan to allow employees to make mid-year election changes to their contributions to employer-sponsored health coverage for plan years 2020 and 2021. This is a big departure from the IRS’ typical rule of irrevocability, which does not allow mid-year changes unless the employee experiences a change in status or unless there is a significant change in the cost of coverage. A public agency may permit employees to make the following types of mid-year election changes:
1) Employees may make a new election on a prospective basis, if the employee initially declined to elect health coverage;
2) Employees may revoke an existing election and make a new election to enroll in different employer-sponsored health coverage on a prospective basis; and/or
3) Employees may revoke an existing election on a prospective basis if the employee attests in writing that the employee is enrolled (or will immediately enroll) in other health coverage not sponsored by the employer.
#2 Mid-Year Election Changes to Health FSAs and DCAPs
Employers may also permit employees to make mid-year election changes to health FSAs and DCAPs for plan years ending in 2020 or 2021, including revoking elections, increasing or decreasing salary reduction contributions, and making new elections. This deviates from the pre-pandemic rule of irrevocability for health FSAs and DCAPs. Although salary reduction changes only apply prospectively, a plan amendment may allow employees to use amounts contributed after the mid-year election for eligible expense incurred from the beginning of the plan year.
#3 Flexibility for Health FSA and DCAP Carryovers and Increase to Carryover Amounts
There are new options that allow employees who have unused health FSA or DCAP contributions at the end of a 2020 or 2021 plan year to carryover and use those amounts in a subsequent plan year instead of losing or wasting them. Section 214 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the “Act”) temporarily allows employees to carryover unused health FSA or DCAP contributions to pay for eligible expenses. This change permits employees to carryover their unused amounts from a plan year ending in 2020 to a plan year ending in 2021. It also permits employees to carryover unused contributions from a plan year ending in 2021 to a plan year ending in 2022.
This flexibility includes a big change from standard DCAP requirements which generally do not allow DCAPS to have carryovers. The IRS temporarily allows employers to establish a carryover for DCAPs for plan years ending in 2020 or 2021.
This change also allows for carryovers beyond the maximum amount previously allowed. Typically, a health FSA with a carryover only allowed an employee to carry over 20% of the annual maximum contribution amount. The maximum carryover from a 2020 plan year to a 2021 plan year is $550 (20% of the maximum contribution of $2,750). However, employers may temporarily allow employees to carryover all or a part of the unused amounts remaining in a health FSA or DCAP, even if that amount exceeds $550.
#4 Extended Grace Periods
A “grace period” is an extended period of time when an employee can apply unused and remaining health FSA or DCAP contributions to pay for or reimburse eligible expenses after the end of the current plan year. Under non-pandemic circumstances, a grace period can be no longer than two (2) months and 15 days following the end of the plan year.
In light of the pandemic, the Act allows employers to adopt an extended grace period of up to 12 months for plan years ending in 2020 or 2021. This will give employees more time to pay for or obtain reimbursement for eligible expenses. For example, an employer can permit employees to use their entire unused health FSA benefits remaining as of December 31, 2020, to pay for eligible medical expenses incurred through December 31, 2021.
Please note that an employer may not permit both a carryover and an extended grace period for a particular health FSA or DCAP in a single plan year under these new flexible rules.
#5 Employees Who Cease Participation in a Health FSA May Continue to Spend Down Funds
Section 214(c)(2) of the Act allows employees who stop participation in a health FSA during calendar year 2020 or 2021 to continue to receive reimbursements from unused contributions through the end of the plan year (including any extended grace period). This flexibility is available to an employee who ceases to be a participant as the result of termination of employment, change in employment status, or a new election during calendar year 2020 or 2021.
#6 Increase to Dependent’s Maximum Age
The Act also increases the maximum age of dependents from age 13 to age 14, which provides an extra year of DCAP fund coverage for children who “aged out” during the pandemic. This allows employees to continue to use DCAP balances for qualified expenses for dependent children who turned age 13 during the 2020 plan year. Further, participants may also use remaining DCAP balances at the end of the 2020 plan year for the dependent’s expenses in 2021, until the dependent reaches age 14.
#7 Increase to Maximum DCAP Contribution
On March 11, 2021, the President signed the H.R. 1319, the American Rescue Plan Act of 2021 (“ARPA”) into law. The ARPA temporarily increases the maximum amount of DCAP benefits from $5,000 to $10,500 (and from $2,500 to $5,250 for taxpayers who are married filing separately). If an employer amends its DCAP to allow for this increase, employees will have the option to make tax-exempt salary reduction contributions of up to $10,500 for 2021.
Important Point: The Flexible Changes Are Not Automatic
The changes in #1-7 above are not automatic and employer-action is required to take advantage of any of the flexible options. Employers who are interested in establishing the flexible changes must affirmatively amend their plan documents. Employers are allowed to pick and choose which changes they want to allow for their employer-sponsored health coverage, health FSAs, and DCAPs.
Employers who offer these changes may adopt a plan amendment retroactively but it must be adopted no later than the last day of the first calendar year that follows the end of the plan year in which the amendment is effective and the employer must operate such plan in accordance with the amendment’s effective date. This means that any amendment should be adopted by December 31, 2021 in order it to apply retroactively to 2020 and by December 31, 2022 in order for it to apply retroactively to 2021.
Employers are not required to permit any or all of the changes. If an employer does not adopt any of the changes, then the usual pre-pandemic rules will remain in place.
Public agencies that are considering adopting any of these flexible options should review the IRS guidance carefully and consult with legal counsel on how to properly adopt plan amendments.
#8 Subsidized COBRA Coverage
The ARPA also makes big changes to who pays for COBRA coverage. Prior to the ARPA, individuals were required to pay their own premiums and up to a 2% administrative fee for COBRA coverage. From April 1 to September 30, 2021, the ARPA requires employers to provide COBRA coverage to eligible individuals at no cost to the individual. Employers will then be eligible for a federal tax credit equal to the cost of coverage. The COBRA subsidy will be available to employees and dependents who have lost employer-sponsored health coverage due to an involuntary separation of employment or involuntary reduction in hours worked.
Employers must notify eligible individuals of their right to receive the COBRA subsidy by May 31, 2021. Employers will also have to update their COBRA notices and send out notices informing eligible individuals when their subsidies are about to expire. The Department of Labor will issue model notices for employer use.
#9 Extended Deadline to Apply for COBRA
Pre-pandemic, a covered employer had 44 days from the loss of group health plan coverage to provide a COBRA election notice to employees. Employees then had 60 days to elect continued coverage.
In 2020, the DOL and the IRS issued a notice that extended the COBRA deadlines during the COVID-19 “outbreak period”, from March 1, 2020 until 60 days after the announced end of the “Coronavirus National Emergency”. However, since the pandemic has lasted more than one year, the DOL, Department of Treasury, and IRS have issued updated guidance on the timeline extension. (Employee Benefits Security Administration Disaster Relief Notice 2021- 01.) The recent guidance clarifies that the extended COBRA deadline will now last until the earlier of:
(1) one year from the date the action would otherwise have been required or permitted; or
(2) 60 days after the announced end of the Coronavirus National Emergency (the end of the “outbreak period”).
For example, if an employee lost health coverage and would have been required to make a COBRA election by March 1, 2020, the employee’s extended deadline to elect COBRA was February 28, 2021, which is the earlier of one year from March 1, 2020 or the end of the outbreak period (which remains ongoing). If an employee loses health coverage and would have been required to make a COBRA election by March 1, 2021, the employee’s extended deadline to elect COBRA ends on the earlier of February 28, 2022 or the end of the outbreak period. It is yet to be seen which date will come sooner.
CalPERS previously indicated that it would apply the DOL and IRS’s COVID-19 Relief Rule and extend COBRA elections for PEMHCA. (CalPERS Circular Letter 600-039-20.)