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IRS Provides Cafeteria Plans New Temporary COVID-19 Flexibility

June 11, 2020

The IRS recently published two items of guidance to allow temporary changes to cafeteria plans. As a result of the guidance, employers may allow employees to make mid-year benefit election changes to respond to changed personal circumstances caused by the 2019 Novel Coronavirus (COVID-19) pandemic. 

In Notice 2020-29, the IRS provides new tools for employers to allow cafeteria plan participants greater flexibility in their personal finances by:

  • extending claims periods to apply unused amounts remaining in a health FSA or dependent care assistance program for expenses incurred for those same qualified benefits through December 31, 2020.
  • expanding the ability to make mid-year elections for health coverage, health FSAs, and dependent care assistance programs.

We should also note that the IRS Notice 2020-29 clarified that the relief for high deductible health plans to cover expenses related to COVID-19 and a temporary exemption for telehealth services applies retroactively to January 1, 2020.

The second cafeteria plan targeted guidance, IRS Notice 2020-33, responds to Executive Order 13877, which directs the Secretary of the Treasury 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 allows employers to increase the annual limit for unused health FSA carryover amounts a cafeteria plan may allow from $500 to a maximum of $550, as adjusted annually for inflation.

These new cafeteria plan options should be studied and considered by employers who sponsor cafeteria plans. These changes are not automatic—instead, the new guidance is permissive. This means that employers can pick and choose which of the new, temporary cafeteria plan rules to adopt as part of their COVID-19 response. To the extent any of the new rules are adopted by a cafeteria plan sponsor, the employer will need to take these steps to properly implement the changes by:

  • clearly communicating the new rules adopted for the employer’s cafeteria plan with the group of employees eligible for the cafeteria plan;
  • administering the new rules adopted for the cafeteria plan on a prospective basis; and
  • amending the written terms of the cafeteria plan retroactive to January 1, 2020 no later than December 31, 2021.

Cafeteria plans are an integral part of many employers’ welfare benefit plan line-ups, and these new options could be very helpful to many employees as they struggle to respond to personal financial issues caused by COVID-19. We expect that most employers will adopt many of these new rules for cafeteria plan flexibility in 2020.


Our insights are published as a service to clients and friends. They are intended to be informational and do not constitute legal advice regarding any specific situation.

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