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.
Daniel J. McMahon, CPA, is the founder and managing partner of Integrated Growth Advisors (IGA), a value creation and growth advisory firm focused on empowering business leaders to systematically enhance their revenues, profitability, sustainability and value. IGA creates sustainability, transferability and wealth for business owners by addressing common issues relating to growth, control and transition of ownership. IGA has been serving clients throughout the U.S. since 2011.
Shawn Degnan leads Cross Country Consulting's National Accounting Advisory practice and the Washington, D.C. office, where he is responsible for the overall strategy, client delivery and people, as well as practice and business development. In this role, he guides service delivery for private and public companies, ranging from growth-oriented venture capital and private equity backed businesses to Fortune 500 companies. He brings more than 20 years of experience advising clients on complex technical accounting issues and strategic transactions, including initial public offerings, mergers and acquisitions, carve-outs, and spinoffs. Prior to joining Cross Country, he spent nine years at MorganFranklin Consulting as managing director and commercial market leader guiding all aspects of the firm's commercial practice. He spent the first 12 years of his career with EY in its global capital markets and assurance practices leading delivery of both audit and advisory engagements for large, global SEC registrants and private companies.
Manish Khetan is president of strategic accounts at Xceedance, with 15 years of experience in transforming insurance operations. He leads the North America business and is responsible for business growth and service delivery at Xceedance. He focuses on identifying growth drivers, business planning, capability development, client relations, organizational learning and development, and alternate channels of expansion, including partnerships and acquisitions.
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.
