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.
Tim Urbanowicz, CFA, is the head of research and investment strategy for Innovator Capital Management.
Prior to joining Innovator, he was a senior investment strategist for Northern Trust, serving as a subject matter expert on global markets and portfolio construction. Prior to joining Northern Trust, he served as the director of fixed income ETFs and head capital markets strategist for Invesco.
J.D. Crouch is the CEO and president of the United Service Organizations, a private nonprofit organization dedicated to strengthening America's military service members by keeping them connected to family, home and country throughout their service to the nation.
Maria Tsennykh, Ph.D., is a principal at CLA in New York. She has more than 17 years of experience in valuation, forensics, litigation, investigations and audit, including serving as an expert witness and 11 years at a Big Four firm. In addition, having worked on two continents, she combines her economic, accounting, corporate finance, valuation and investigation backgrounds to advise clients on a variety of complex circumstances in the U.S. and internationally. Her experience includes damages analysis, assessment of corporate governance practices and internal controls, business and intangible assets valuation, and international arbitration advisory. She also regularly directs large-scale financial investigative assignments including forensic accounting investigations, financial fraud investigations, financial reporting investigations, white-collar crime investigations, corporate governance investigations and investigations involving the Foreign Corrupt Practices Act (FCPA).
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.
