The Internal Revenue Service issued guidance Tuesday to make temporary changes to section 125 cafeteria plans, with the goal of providing tax relief and flexibility in the midst of the novel coronavirus pandemic. The IRS is extending the claims period for health care flexible spending arrangements and dependent care assistance programs and enabling taxpayers to make mid-year changes to their accounts.
The guidance released Tuesday by the IRS deals with the unanticipated changes in expenses faced by many taxpayers as a result of the COVID-19 pandemic. The IRS is now allowing its previously provided temporary relief for high deductible health plans to be applied retroactively to Jan. 1, 2020, and also increases for inflation the $500 permitted carryover amount for health FSAs to $550.
Burcu Bree Manay is founder and managing partner of Manay CPA. She serves on the board of the Georgia Chamber of Commerce and is a member of the Forbes Business Council. She is a CPA and Certified Tax Coach with about 25 years of professional accounting, financial planning, tax and business consultancy experience in various U.S. and international sectors.
Gurpreet Chaggar is an associate product marketing manager at Prophix. She joined the company in 2019 as an implementation consultant, where she developed a deep understanding of Prophix's solutions and the impact Prophix has on helping clients optimize business outcomes.
Heather Robison is a marketing manager, strategist and facilitator at Boomer Consulting Inc., where she works with accounting firm leaders to rethink how marketing and business development drive sustainable growth. She leads the Boomer Marketing and Business Development Circle, where she facilitates peer-driven conversations and surfaces patterns from top-performing firms.
In Notice 2020-29, the IRS is offering extra flexibility to taxpayers by:
- extending the claims periods for taxpayers 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 of taxpayers to make mid-year elections for health coverage, health FSAs and dependent care assistance programs, allowing them to respond to changes in needs as a result of the COVID-19 pandemic; and
- 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.
In conjunction with that notice, the IRS also issued Notice 2020-33, in response to the Trump administration’s Executive Order 13877, which directs the Treasury secretary 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 ups the limit for unused health FSA carryover amounts from $500, to a maximum of $550, adjusted each year for inflation.
