IRS Provides Tax Relief for Taxpayers with Section 125 Cafeteria Plans

May 13, 2020

The IRS recently released guidance to allow temporary changes to section 125 cafeteria plans to extend the claims period for health flexible spending arrangements (FSAs) and dependent care assistance programs as well as allow taxpayers to make mid-year changes.

The guidance addresses unanticipated changes in expenses because of the COVID-19 pandemic and states that previously provided temporary relief for high deductible health plans may be applied retroactively to Jan. 1, 2020. It also increases for inflation the $500 permitted carryover amount for health FSAs to $550.

Notice 2020-29 provides greater flexibility for taxpayers by:

  • Extending claims periods to apply unused amounts remaining in a health FSA or dependent care assistance program for expenses incurred for those same qualified benefits through Dec. 31, 2020
  • Expanding the ability to make mid-year elections for health coverage, health FSAs, and dependent care assistance programs, allowing a response to changes in needs as a result of the COVID-19 pandemic
  • Applying earlier relief for high deductible health plans to cover expenses related to COVID-19 and a temporary exemption for telehealth services retroactively to Jan. 1, 2020

Notice 2020-33 responds to Executive Order 13877, which directs the Secretary of the Treasury to "issue guidance to increase the amount of funds that can carry over without penalty at the end of the year for flexible spending arrangements." The notice increases the limit for unused health FSA carryover amounts from $500 to a maximum of $550, as adjusted annually for inflation.