IRS allows employee mid-year health benefits changes due to COVID-19

Dive Brief:

Employees may have temporary flexibility to make certain prospective mid-year election changes for employer-sponsored health coverage, healthcare flexible spending accounts (FSAs) and dependent care assistance programs during the 2020 calendar year, according to an IRS notice published earlier this month.
Under the notice, health plans may permit eligible employees to make a new plan election on a prospective basis, even if such an employee initially declined to elect employer-sponsored coverage. The employee may also be permitted to revoke an existing election to enroll in a different health plan sponsored by the same employer as well as change enrollment from self-coverage to family coverage, among other options.
Employers may permit similar employee actions with respect to FSAs and dependent care assistance programs. Additionally, the IRS said health plans may permit employees to apply unused amounts remaining in a health FSA or dependent care program to pay or reimburse medical care expenses or dependent care expenses.

Dive Insight:

The announcement is "welcome news" to employees whose financial situations have been impacted by the pandemic, David Speier, managing director, benefits accounts at Willis Towers Watson, told HR Dive in an email. But the changes must be adopted by employers in order for employees to take advantage of them, he noted.

Ultimately, some employers will evaluate any health plan changes closely before adopting them, Speier said. The guidance may require extra paperwork for employers to implement but would provide additional flexibility to workers, he added.

Employers may also need to note additional updates by the IRS during the pandemic that affect employee benefits. Earlier this May, the agency clarified in an updated FAQ document that employers that qualify for the federal employee retention tax credit may treat health expenses paid to furloughed employees as qualified wages. Health insurance costs are also included in the tax credit for small employers impacted by the Families First Coronavirus Response Act.

Estimates of the pandemic's impact on healthcare costs vary. A general observation by Willis Towers Watson and other advisory firms is that COVID-19 treatment and testing could add significant costs for employers given higher rates of infection. At the same time, employees may choose to defer medical care during the pandemic, potentially offsetting any additional costs.