This week the IRS finally announced the applicable per participant PCORI tax rates for group health plan with Plan Year ending during the last three months of 2019. The applicable rate will be $2.54 per participant.
When the PCORI tax was introduced as part of the Affordable Care Act, it went into effect for Plan Years ending on or after October 1, 2012. The ACA provided for the tax to increase each year based on inflation with the increased rates going into effect each subsequent October 1. The increases have historically been announced by the end of each calendar year. Because the PCORI tax payments are due by July 31 of the following calendar year insurers and Plan Sponsors of self-insured group health plans had plenty of time to calculate their tax and prepare their filings.
Under the terms of the ACA, the PCORI tax would not apply to any Plan Years ending on or after September 30, 2019. Therefore, there was no need for the IRS to issue an annual increase for Plan Years ending in the fourth quarter of 2019. However, on December 20, 2019, President Trump signed the “Further Consolidated Appropriations Act” into law. The Act extended the PCORI tax for another 10 years.
At that point, plans with Plan Year ending during the first 9 months of 2019 knew that their tax rate for payments due this July would be $2.45 but we did not know the $2.54 rate for Plan Years ending during the last three months of 2019 until this week.
The new rates were announced in IRS Notice 2020-44. Additionally, this week the IRS published an updated version of Form 720 to reflect the extension of the PCORI tax and the new rate for Plan Years ending in late 2019. Insurers and Plan Sponsors of self-insured group health plans may complete their filings and make their tax payments at this time.”
More information about the PCORI tax, including which plans are required to file a return and pay the tax, as well as instruction for completing the process are available in a guide we wrote for clients this month. It is available online here.
This week the IRS released two new sets of rules impacting Section 125 Cafeteria Plans. Notice 2020-33 provides permanent rule changes that include an increase in the amount of unused benefits that Health FSA plans may allow plan participants to rollover from one plan year to the next. Notice 2020-29 provides temporary rules designed to improve employer sponsored group health benefits for eligible employees in response to the coronavirus pandemic. The relief provided under each notice is optional for employers. Employers who choose to take advantage of any of the offered plan options will be required to notify eligible employees and will eventually be required to execute written plan amendments.
Notice 2020-33 modifies the amount of annual rollover of unused benefits that Health FSA plans may offer to Plan participants. Up until now, rollovers have been limited to $500 per Plan Year. The new rule sets the annual rollover limit to 20% of the statutory maximum annual employee Health FSA contribution for the applicable Plan Year. Because the statutory maximum is indexed for inflation, most years it increases (in mandated increments of $50). Therefore, in years where the contribution limit increases by $50, the annual rollover limit will correspondingly increase by $10.
The notice provides that the increased rollover amount may apply to Plan Years beginning on or after January 1, 2020. Because the corresponding annual Health FSA employee contribution limit for those Plan Years is $2,750, the annual rollover limit may be increased up to $550.
The relief provided under Notice 2020-29 falls into two major categories, both of which apply only for calendar year 2020. First, the IRS introduces several significant exceptions to the mid-year change of election rules generally applicable to Section 125 Cafeteria Plans. Second, the notice contains a special grace period which offers Health Flexible Spending Arrangement (FSA) and Dependent Care Assistance Program (DCAP) Participants additional time to incur eligible expenses during 2020.
The temporary exceptions to mid-year participant election change rules for 2020 authorize employers to allow employees who are eligible to participate in a Section 125 Cafeteria Plan to:
make a new election to participate in employer sponsored group health plan coverage if the employee originally declined coverage at open enrollment;
change coverage options previously elected during open enrollment;
drop group coverage for covered family members or themselves if they will be replacing the coverage for the impacted individual immediately with other coverage;
make a prospective election to add, change or drop a Health FSA election; and
make a prospective election to add, change or drop a DCAP election.
None of the above described election changes require compliance with the consistency rules which typically apply for mid-year Section 125 Cafeteria Plan election changes. They also do not require a specific impact from the coronavirus pandemic for the employee.
Employers have the ability to limit election changes that would otherwise be permissible under the exceptions permitted by Notice 2020-29 so long as the limitations comply with the Section 125 non-discrimination rules. For allowable Health FSA or DCAP election changes, employers may limit the amount of any election reduction to the amount previously reimbursed by the plan. Interestingly, even though new elections to make Health FSA and DCAP contributions may not be retroactive, Notice 2020-29 provides that amounts contributed to a Health FSA after a revised mid-year election may be used for any medical expense incurred during the first Plan Year that begins on or after January 1, 2020.
For the election change described in item 3 above, the enrolled employee must make a written attestation that any coverage being dropped is being immediately replaced for the applicable individual. Employers are allowed to rely on the employee’s written attestation without further documentation unless the employer has actual knowledge that the attestation is false.
The special grace period introduced in Notice 2020-29 allows all Health FSAs and DCAPs with a grace period or Plan Year ending during calendar year 2020 to allow otherwise eligible expenses to be incurred by Plan Participants until as late as December 31, 2020. This temporary change will provide relief to non-calendar year based plans. Based on the rules of this special grace period, calendar year Health FSA plans that offer rollovers of unused benefits will not benefit.
The notice does clarify that this special grace period is permitted for non-calendar year Health FSA plans even if the plan provides rollover of unused benefits. Previous guidance had prohibited Health FSA plans from offering both grace periods and rollovers but Notice 2020-29 provides a limited exception to that rule.
The notice raises one issue for employers to consider before amending their plan to offer the special grace period. The special grace period will adversely affect the HSA contribution eligibility of individuals with unused Health FSA benefits at the end of the standard grace period or Plan Year for which a special grace period is offered. This will be of particular importance for employers with employees who may be transitioning into a HDHP group health plan for the first time at open enrollment.
As mentioned above, employers wishing to incorporate any of the allowable changes offered under Notices 2020-29 and 2020-33 will be required to execute written amendments to their Plan Documents and the changes should be reflected in the Plan’s Summary Plan Description and/or a Summary of Material Modification. Notice 2020-29 requires that any such Plan Amendment must be executed by the Plan Sponsor no later than December 31, 2021.
In the next few weeks, Admin America will be reaching out to the employers for whom we provide Health FSA and DCAP administrative services with instructions for implementing any of the changes described in the Notices described here. Any plan updates and any required Plan Amendments will be provided at no additional charge for plans for which Admin America provides monthly administrative services. Admin America will also work with employers to provide communication templates for their eligible employees. You may submit any questions you have about these notices via our new online Q & A Forum and they will be addressed promptly by our team.