IRS Notices 2020-29 and 2020-33 – Options for Employers

The IRS published two Notices on May 12, 2020 allowing changes to cafeteria plans. Notice 2020-29 provides temporary election changes and extended periods of time to incur FSA expenses and Notice 2020-33 changes the maximum carryover amount for health flexible spending accounts. The provisions we discuss in this blog are optional for employers and are not required changes.

Employer Choices

1. Mid-year Election Changes for Group Health Plans and FSA (IRS Notice 2020-29)

Notice 2020-29 provides that employers may allow their employees to make a mid-year election to enroll, revoke, or change their group health plans and flexible spending accounts (FSA) elections without a specific qualifying event.  Under the new rules account holders may change their elections prospectively:

    • Make a new election for employer-sponsored health coverage on a prospective basis if the employee initially declined coverage
    • Make changes to health coverage with the same employer – e.g., change from individual to family coverage or change from one type of plan to another prospectively
    • Revoke existing coverage on a prospective basis, if the employee confirms in writing that they are enrolled or will immediately enroll in other health coverage not sponsored by their employer
    • Revoke an election, make a new election, or decrease or increase an existing election regarding a health FSA (HFSA) on a prospective basis (no refunds of unspent amounts allowed)
    • Revoke an election, make a new election, or decrease or increase an existing election regarding a dependent care FSA (DCFSA) on a prospective basis (no refunds of unspent amounts allowed)

Employers can decide whether to allow these changes. The IRS Notice says that employers are not required to provide unlimited changes and employers may limit the window of time to make election changes. Employers may determine the extent of the allowable change and limit elections to circumstances where the employee’s coverage will be increased or improved as a result of the election – e.g., self only to family coverage or low option plan to high option plan. Also, where the employee is revoking coverage under your health plans, the employee must attest in writing that the employee is enrolled, or immediately will enroll, in other comprehensive health coverage not sponsored by the employer. Employers may rely on the attestation unless they have knowledge that the employee will not be covered in other coverage. The Notice provides sample attestation language.

Employers who have already allowed changes in their health plans for FSAs due to COVID-19 may rely on this relief retroactively to January 1, 2020.

Important Note – employers must remember that any changes they allow for their active employees must also be allowed for their COBRA members.

2.  Increase in Carryover Limit (IRS Notice 2020-33)

Notice 2020-33 increases the $500 carryover limit for unused amounts remaining in a health flexible spending arrangement (health FSA) that may be carried over into the following plan year. The new maximum carryover limit is defined as 20 percent of the maximum HFSA salary reduction amount under §125(i) (2020 limit is $2,750), which is indexed for inflation. Thus, for 2020, under this new notice, the carryover amount will increase to $550 ($2,750 x 20%) for 2021 carryovers. This amount will increase in increments of $10 when the HFSA maximum limit increases. Employers may still limit the carryover to a flat dollar amount, even less than $500. Employers may also implement the increased carryover amount even if their plan uses a lower HFSA annual election limit.

3.  Extended Period to Incur Expenses for Health FSA & Dependent Care FSA (IRS Notice 2020-29)

IRS Notice 2020-29 provides increased flexibility with respect to certain cafeteria plans to apply unused amounts in a health FSA or dependent care FSA to pay or reimburse medical care expenses or dependent care expenses incurred through December 31, 2020. This provision will not apply to all FSA plans, but to plans that do not run on a calendar basis or plans that have a grace period ending in 2020.  This relief applies to general purpose HFSAs and limited purpose HFSAs compatible with health savings accounts (HSA).

Example 1 (grace period) – an employer sponsors a calendar year cafeteria plan with a HFSA and the plan contains a grace period which expired on March 15, 2020.  The employer may amend the plan to extend the grace period through December 31, 2020.  This will permit employees to continue to incur health care expenses through December 31, 2020 to spend down the HFSA account remaining in their account as of March 15, 2020.

Example 2 (off calendar year and no grace period) – an employer sponsors a cafeteria plan with a HFSA and the plan year is July 1, 2019 – June 30, 2020.  The employer may amend the plan to allow HFSA participants with account balances remaining at the end of June 30, 2020 to continue to incur health care expenses through December 31, 2020, and be reimbursed from the amount remaining in the account as of June 30, 2020, in addition to any applicable carryover.

Important Note – an individual who had unused amounts remaining at the end of a plan year or grace period ending in 2020 and who is allowed an extended period to incur expenses under a health FSA will not be eligible to contribute to an HSA during the extended period (except in the case of an HSA-compatible health FSA, including a health FSA that is amended to be HSA-compatible, or a limited purpose HFSA).

Plan Amendments

If employers wish to implement any of these provisions, plan amendments must be signed by the end of the plan year beginning in 2021.

TRI-AD Commentary

Some employers are looking for ways to assist their employees during the COVID-19 pandemic. If implemented, these changes require employers to manage the changes with their employees and service providers. Service providers will need to change their administrative processes, systems, and participant communications. Some of the changes are more significant than others and require ample lead time.  It is important for employers to determine what changes they would like to implement and convey those changes to any third-party benefits administrator even if they do not provide all of the services impacted by the IRS Notices as other service lines may be impacted.


TRI-AD and our Associates’ suggestions or recommendations shall not constitute legal advice. No content on our website can be construed as tax or legal advice and TRI-AD may not be considered your legal counsel or tax advisor. Clients are encouraged to consult with their tax advisor and/or attorney to determine their legal rights, responsibilities, and liabilities. This includes the interpretation of any statute or regulation, federal, state or local; and/or its application to the clients’ business activities.