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.
David Lingerfelt is senior director of indirect tax at Avalara. He is a tax attorney specializing in indirect taxes. He worked as a government tax administrator for seventeen years before joining Avalara. His regulatory experience includes auditing, tax controversy, collections, taxpayer education, and compliance documents processing.
Alex Loewenstein is the general manager of Paro for CPA Firms at Paro.
Shaun Spearmon helps clients successfully transform their organizations and accelerate the implementation of their most strategic objectives. For more than 15 years he has led strategic planning, process improvement and change management initiatives with clients across industries, including technology, aerospace, pharmaceuticals, retail and financial services. Most recently he developed and led the change management and communication strategy for Global Store Development at Starbucks. Shaun is a firm believer in the power of servant leadership and its ability to create excellence in individuals and produce extraordinary results for organizations. He earned his MBA from the University of Washington's Foster School of Business where he pursued dual concentrations in Strategy and Organizational Development and holds a BA in Business Administration from Morehouse College. Shaun is based out of Seattle, WA.
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.
