n-20-29.pdf

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COVID-19 GUIDANCE UNDER § 125 CAFETERIA PLANS AND RELATED TO HIGH
DEDUCTIBLE HEALTH PLANS
Notice 2020-29

I. PURPOSE AND OVERVIEW
To assist with the nation’s response to the 2019 Novel Coronavirus outbreak
(COVID-19), this notice provides for increased flexibility with respect to mid-year
elections under a § 125 cafeteria plan during calendar year 2020 related to employer-
sponsored health coverage, health Flexible Spending Arrangements (health FSAs), and
dependent care assistance programs. This notice also provides increased flexibility with
respect to grace periods to apply unused amounts in health FSAs to medical care
expenses incurred through December 31, 2020, and unused amounts in dependent
care assistance programs to dependent care expenses incurred through December 31,
2020.
As described more fully below, this notice provides that –
• For mid-year elections made during calendar year 2020, a § 125 cafeteria
plan may permit employees who are eligible to make salary reduction
contributions under the plan to: (1) with respect to employer-sponsored
health coverage, (a) make a new election on a prospective basis, if the
employee initially declined to elect employer-sponsored health coverage;
(b) revoke an existing election and make a new election to enroll in different
health coverage sponsored by the same employer on a prospective basis;

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and (c) revoke an existing election on a prospective basis, provided that the
employee attests in writing that the employee is enrolled, or immediately will
enroll, in other health coverage not sponsored by the employer; (2) revoke an
election, make a new election, or decrease or increase an existing election
applicable to a health FSA on a prospective basis; and (3) revoke an election,
make a new election, or decrease or increase an existing election regarding a
dependent care assistance program on a prospective basis;
• For unused amounts remaining in a health FSA or a dependent care
assistance program under the § 125 cafeteria plan as of the end of a grace
period or plan year ending in 2020, a § 125 cafeteria plan may permit
employees to apply those unused amounts to pay or reimburse medical care
expenses or dependent care expenses, respectively, incurred through
December 31, 2020; and
• The relief provided in Notice 2020-15, 2020-14 IRB 559 regarding high
deductible health plans (HDHPs) and expenses related to COVID-19, and in
section 3701 of the Coronavirus Aid, Relief, and Economic Security Act
(CARES Act) (P.L. 116-136, 134 Stat. 281 (March 27, 2020)) regarding an
exemption for telehealth services, may be applied retroactively to January 1,
2020.
II. BACKGROUND
A. Elections Under a § 125 Cafeteria Plan
Section 125(d)(1) of the Internal Revenue Code (Code) defines a § 125 cafeteria
plan as a written plan maintained by an employer under which all participants are

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employees, and all participants may choose among two or more benefits consisting of
cash and qualified benefits. Subject to certain exceptions, § 125(f) defines a qualified
benefit as any benefit which, with the application of § 125(a), is not includable in the
gross income of the employee by reason of an express provision of the Code. Qualified
benefits that may be provided under a § 125 cafeteria plan include employer-provided
accident and health plans excludable under §§ 106 and 105(b), health FSAs excludable
under §§ 106 and 105(b), and dependent care assistance programs excludable under
§ 129.
Elections regarding qualified benefits under a § 125 cafeteria plan generally must
be irrevocable and must be made prior to the first day of the plan year, except as
provided under Treas. Reg. § 1.125-4.
1
Treas. Reg. § 1.125-4 provides that a § 125
cafeteria plan may permit an employee to revoke an election during a period of
coverage and to make a new election under certain circumstances, such as if the
employee experiences a change in status or there are significant changes in the cost of
coverage. Section 125 does not require a § 125 cafeteria plan to permit the mid-year
election changes allowed under Treas. Reg. § 1.125-4.
Due to the nature of the public health emergency posed by COVID-19 and
unanticipated changes in the need for medical care, some employers have indicated a
willingness to offer employees who initially declined to elect employer-sponsored health
coverage an opportunity to elect health coverage or allow employees enrolled in

1
In contrast, for qualified transportation fringe benefits under § 132(f) (which pursuant to § 125(f)(1) may
not be offered under a § 125 cafeteria plan), Treas. Reg. § 1.132-9, Q&A 14 provides that employees
may change or revoke compensation reduction elections related to the qualified transportation fringe
benefits under § 132(f) before the employee is able currently to receive the cash or other taxable amount
at the employee’s discretion (generally before the beginning of a pay period).

4

employer-sponsored health coverage to enroll in different health coverage offered by
the same employer or drop their existing employer-sponsored health coverage to enroll
in other health coverage not offered by their employer (for example, coverage offered by
their spouse’s employer). In addition, some employees may have an increase or
decrease in medical expenses due to unanticipated changes in the need for or
availability of medical care and may wish to increase or decrease amounts in their
health FSAs. Further, some employees may have an increase or decrease in the need
for dependent care assistance due to the unanticipated closure of schools and child
care providers and changes to the employee’s work location or schedule. Depending on
an employee’s circumstances, the exceptions set forth in Treas. Reg. § 1.125-4 may not
apply with respect to election changes that employees may wish to request for
employer-sponsored health coverage, health FSAs, and dependent care assistance
programs for reasons related to the COVID-19 public health emergency.
B. Health FSAs and Dependent Care Assistance Programs
Under the carryover rule, a § 125 cafeteria plan may permit the carryover of
unused amounts remaining in a health FSA as of the end of a plan year to pay or
reimburse a participant for medical care expenses incurred during the following plan
year, subject to the carryover limit (currently $550). See Notice 2013-71, 2013-47 IRB
532, and Notice 2020-33, 2020-22 IRB ___. Under the grace period rule, a § 125
cafeteria plan may permit a participant to apply unused amounts (including amounts
remaining in a health FSA or dependent care assistance program) at the end of a plan
year to pay expenses incurred for those same qualified benefits during the period of up
to two months and 15 days immediately following the end of the plan year. See

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Notice 2005-42, 2005-1 C.B. 1204, and Prop. Treas. Reg. § 1.125-1(e). For a health
FSA, a § 125 cafeteria plan may adopt a carryover or a grace period (or neither), but
may not adopt both features. See Notice 2013-71.
Due to the nature of the public health emergency posed by COVID-19, in
particular unanticipated changes in the availability of certain medical care and
dependent care, employees may be more likely to have unused health FSA amounts or
dependent care assistance program amounts (or have larger unused health FSA
amounts or dependent care assistance program amounts) as of the end of plan years,
or grace periods, ending in 2020 and may wish to have an extended period during
which to apply their unused health FSA amounts or dependent care assistance program
amounts to pay or reimburse medical care expenses or dependent care expenses.
C. Impact of Health FSA Reimbursements on Eligibility to Contribute to
an HSA
Section 223 permits eligible individuals to establish and contribute to health
savings accounts (HSAs). Pursuant to § 223(c)(1)(A), an eligible individual is, with
respect to any month, any individual if (i) such individual is covered under an HDHP as
of the first day of such month, and (ii) such individual is not, while covered under an
HDHP, covered under any health plan which is not an HDHP, and which provides
coverage for any benefit which is covered under the HDHP. An HDHP is a health plan
that satisfies the minimum annual deductible requirement and maximum out-of-pocket
expenses requirement under § 223(c)(2)(A).

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Coverage by a general purpose health FSA is coverage by a health plan that
disqualifies an otherwise eligible individual from contributing to an HSA, although
coverage by a limited purpose health FSA would not do so.
2
See Rev. Rul. 2004-45,
2004-1 C.B. 971. Similarly, a telemedicine arrangement generally constitutes a health
plan or insurance that provides coverage before the minimum annual deductible is met,
and provides coverage that is not disregarded coverage or preventive care, which would
generally disqualify an otherwise eligible individual from contributing to an HSA.
However, section 3701 of the CARES Act amended § 223 of the Code to temporarily
allow HSA-eligible HDHPs to cover telehealth and other remote care services. See
section IV.B. of this notice for more details.
III. RELIEF
A. Elections Under a § 125 Cafeteria Plan
This notice provides temporary flexibility for § 125 cafeteria plans to permit
employees to make certain prospective mid-year election changes for employer-
sponsored health coverage, health FSAs, and dependent care assistance programs
during calendar year 2020 that the plan chooses to permit. Specifically, an employer, in
its discretion, may amend one or more of its § 125 cafeteria plans (including limiting the
period during which election changes may be made) to allow each employee who is
eligible to make salary reduction contributions under the plan to make prospective

2
Notice 2005-86, 2005-49 IRB 1075 clarifies that coverage by a general purpose health FSA during a
grace period is health coverage that disqualifies an otherwise eligible individual from contributing to an
HSA during that period. However, Notice 2005-86 provides methods an employer can use to amend the
health FSA for the grace period so it does not disqualify employees from contributing to an HSA during
that period.

7

election changes (including an initial election) during calendar year 2020 regarding
employer-sponsored health coverage, a health FSA, or a dependent care assistance
program, regardless of whether the basis for the election change satisfies the criteria
set forth in Treas. Reg. § 1.125-4. In particular, an employer may amend one or more of
its § 125 cafeteria plans to allow employees to: (1) make a new election for employer-
sponsored health coverage on a prospective basis, if the employee initially declined to
elect employer-sponsored health coverage; (2) revoke an existing election for employer-
sponsored health coverage and make a new election to enroll in different health
coverage sponsored by the same employer on a prospective basis (including changing
enrollment from self-only coverage to family coverage); (3) revoke an existing election
for employer-sponsored health coverage on a prospective basis, provided that the
employee attests in writing that the employee is enrolled, or immediately will enroll, in
other health coverage not sponsored by the employer; (4) revoke an election, make a
new election, or decrease or increase an existing election regarding a health FSA on a
prospective basis; and (5) revoke an election, make a new election, or decrease or
increase an existing election regarding a dependent care assistance program on a
prospective basis.
To accept an employee’s revocation of an existing election for employer-
sponsored health coverage, the employer must receive from the employee an
attestation in writing that the employee is enrolled, or immediately will enroll, in other
comprehensive health coverage not sponsored by the employer. The employer may rely
on the written attestation provided by the employee, unless the employer has actual
knowledge that the employee is not, or will not be, enrolled in other comprehensive

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health coverage not sponsored by the employer. The following is an example of an
acceptable written attestation:
Name: _______________________ (and other identifying information
requested by the employer for administrative purposes).

I attest that I am enrolled in, or immediately will enroll in, one of the following
types of coverage: (1) employer-sponsored health coverage through the
employer of my spouse or parent; (2) individual health insurance coverage
enrolled in through the Health Insurance Marketplace (also known as the
Health Insurance Exchange); (3) Medicaid; (4) Medicare; (5) TRICARE; (6)
Civilian Health and Medical Program of the Department of Veterans Affairs
(CHAMPVA); or (7) other coverage that provides comprehensive health
benefits (for example, health insurance purchased directly from an
insurance company or health insurance provided through a student health
plan).

Signature: ______________________

An employer utilizing this relief under § 125 is not required to provide unlimited
election changes but may, in its discretion, determine the extent to which such election
changes are permitted and applied, provided that any permitted election changes are
applied on a prospective basis only, and the changes to the plan’s election
requirements do not result in failure to comply with the nondiscrimination rules
applicable to § 125 cafeteria plans. In determining the extent to which election changes
are permitted and applied, an employer may wish to consider the potential for adverse
selection of health coverage by employees. To prevent adverse selection of health
coverage, an employer may wish to limit elections to circumstances in which an
employee’s coverage will be increased or improved as a result of the election (for
example, by electing to switch from self-only coverage to family coverage, or from a low
option plan covering in-network expenses only to a high option plan covering expenses
in or out of network). Changes to the plan may also implicate other applicable laws,

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such as notice requirements under Title I of the Employee Retirement Income Security
Act of 1974, with which any changes should comply. With respect to mid-year election
changes for employer-sponsored coverage, this relief applies to both employers
sponsoring self-insured plans and employers sponsoring insured plans. With respect to
health FSAs, this relief applies to all health FSAs, including limited purpose health FSAs
compatible with HSAs. In addition, with respect to health FSAs and dependent care
assistance programs, employers are permitted to limit mid-year elections to amounts no
less than amounts already reimbursed.
This relief may be applied retroactively to periods prior to the issuance of this
notice and on or after January 1, 2020, to address a § 125 cafeteria plan that, prior to
the issuance of this notice, permitted mid-year election changes for employer-
sponsored health coverage, health FSAs, or dependent care assistance programs that
otherwise are consistent with the requirements for the relief provided in this notice.
B. Extended Claims Period for Health FSAs and Dependent Care
Assistance Programs
This notice also provides flexibility for a § 125 cafeteria plan to provide an
extended period to apply unused amounts remaining in a health FSA or dependent care
assistance program to pay or reimburse medical care expenses or dependent care
expenses. Specifically, an employer, in its discretion, may amend one or more of its
§ 125 cafeteria plans to permit employees to apply unused amounts remaining in a
health FSA or a dependent care assistance program as of the end of a grace period
ending in 2020 or a plan year ending in 2020 to pay or reimburse expenses incurred for
the same qualified benefit through December 31, 2020. For example, if an employer

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sponsors a § 125 cafeteria plan with a health FSA that has a calendar year plan year
and provides for a grace period ending on March 15 immediately following the end of
each plan year, the employer may amend the plan to permit employees to apply unused
amounts remaining in an employee’s health FSA as of March 15, 2020, to reimburse the
employee for medical care expenses incurred through December 31, 2020.
3
This relief
applies to all health FSAs, including limited purpose health FSAs compatible with HSAs.
However, health FSA amounts may only be used for medical care expenses, and
dependent care assistance program amounts may only be used for dependent care
expenses.
The extension of time for incurring claims is available both to § 125 cafeteria
plans that have a grace period, and plans that provide for a carryover, notwithstanding
Notice 2013-71, which otherwise continues in effect and provides that health FSAs can
either adopt a grace period or provide for a carryover amount but cannot have both. The
following examples illustrate how a plan with a July 1 plan year that allows a $500
carryover would implement the extended period for incurring claims allowed by this
notice:
Example 1. Employer provides a health FSA under a § 125 cafeteria plan that allows a
$500 carryover for the 2019 plan year (July 1, 2019 to June 30, 2020). Pursuant to this
notice and Notice 2020-33, Employer amends the plan to adopt a $550 (indexed)
carryover beginning with the 2020 plan year, and also amends the plan to adopt the
temporary extended period for incurring claims with respect to the 2019 plan year,
allowing for claims incurred prior to January 1, 2021, to be paid with respect to amounts
from the 2019 plan year.

Employee A has a remaining balance in his health FSA for the 2019 plan year of $2,000
on June 30, 2020, because a scheduled non-emergency procedure was postponed. For
the 2020 plan year beginning July 1, 2020, Employee A elects to contribute $2,000 to
his health FSA. Employee A is able to reschedule the procedure before December 31,

3
Certain plans would not need the relief provided in this notice. For example, a plan with a plan year
ending on or after October 31, 2020, continues to be able to provide a grace period of up to two months
and 15 days, which would allow the reimbursement of claims incurred after December 31, 2020.

11

2020 and, between July 1, 2020 and December 31, 2020, incurs $1,900 in medical care
expenses. The health FSA may reimburse Employee A $1,900 from the $2,000
remaining in his health FSA at the end of the 2019 plan year, leaving $100 unused from
the 2019 plan year. Under the plan terms that provide for a carryover, Employee A is
allowed to use the remaining $100 in his health FSA until June 30, 2021, to reimburse
claims incurred during the 2020 plan year. Employee A may be reimbursed for up to
$2,100 ($2,000 contributed to the health FSA for the 2020 plan year plus $100
carryover from the 2019 plan year) for medical care expenses incurred between
January 1, 2021 and June 30, 2021. In addition, Employee A may carry over to the
2021 plan year beginning July 1, 2021 up to $550 of any remaining portion of that
$2,100 after claims are processed for the 2020 plan year that began July 1, 2020. A
grace period is not available for the plan year ending June 30, 2021.

Example 2. Same facts as Example 1, except that Employee B has a remaining
balance in his health FSA for the 2019 plan year of $1,250 on June 30, 2020. For the
2020 plan year beginning July 1, 2020, Employee B elects to contribute $1,200 to his
health FSA. Between July 1, 2020 and December 31, 2020, Employee B incurs $600 in
medical care expenses. The health FSA may reimburse Employee B $600 from the
$1,250 remaining in his health FSA at the end of the 2019 plan year, leaving $650
unused from the 2019 plan year. Under the plan terms, Employee B is allowed to use
$500
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of the $650 unused amount from the 2019 plan year to reimburse claims incurred
during the 2020 plan year, and the remaining $150 will be forfeited. Employee B may be
reimbursed for up to $1,700 ($1,200 contributed to the health FSA for the 2020 plan
year plus $500 carryover from the 2019 plan year) for medical care expenses incurred
between January 1, 2021 and June 30, 2021. In addition, Employee B may carry over to
the 2021 plan year beginning July 1, 2021 up to $550 of any remaining unused portion
of that $1,700 after claims are processed for the 2020 plan year that began July 1,
2020. A grace period is not available for the plan year ending June 30, 2021.

The extension of the period for incurring claims that may be reimbursed by the
health FSA is an extension of coverage by a health plan that is not an HDHP for
purposes of determining whether an eligible individual qualifies to make contributions to
an HSA (except in the case of an HSA-compatible health FSA, such as a limited
purpose health FSA). See section II.C. of this notice. Thus, an individual who had
unused amounts remaining at the end of a plan year or grace period ending in 2020 and

4
The maximum unused amount remaining in a health FSA from a plan year beginning in 2019 allowed to
be carried over to the immediately following plan year beginning in 2020 is $500, whereas the maximum
unused amount remaining in a health FSA from a plan year beginning in 2020 allowed to be carried over
to the immediately following plan year beginning in 2021 is $550 (20 percent of $2,750, the indexed 2020
limit under § 125(i)). See Notice 2020-33.

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who is allowed an extended period to incur expenses under a health FSA pursuant to a
plan amended in accordance with this notice will not be eligible to contribute to an HSA
during the extended period (except in the case of an HSA-compatible health FSA,
including a health FSA that is amended to be HSA-compatible).
The relief set forth in this notice may be applied on or after January 1, 2020 and
on or before December 31, 2020, provided that any elections made in accordance with
this notice apply only on a prospective basis.
C. Plan Amendments
An employer that decides to amend one or more of its § 125 cafeteria plans to
provide for mid-year election changes for employer-sponsored health coverage, health
FSAs, or dependent care assistance programs in a manner consistent with this notice or
to provide for an extended period to apply unused amounts remaining in a health FSA
or a dependent care assistance program to pay or reimburse medical care expenses or
dependent care expenses in a manner consistent with this notice must adopt a plan
amendment. In addition, an employer that decides to amend its health FSA to provide
for an increase in the carryover of unused amounts to the following year in a manner
consistent with Notice 2020-33, for the 2020 plan year or plan years thereafter, must
adopt a plan amendment.
An amendment for the 2020 plan year must be adopted on or before
December 31, 2021, and may be effective retroactively to January 1, 2020, provided
that the § 125 cafeteria plan operates in accordance with this notice or Notice 2020-33
or both, as applicable, and the employer informs all employees eligible to participate in

13

the § 125 cafeteria plan of the changes to the plan. Any amendment adopted pursuant
to this notice must apply only to mid-year elections made during calendar year 2020, or
to an extended period to apply unused health FSA amounts or dependent care
assistance program amounts for the payment or reimbursement of medical care
expenses or dependent care expenses incurred through December 31, 2020.
IV. MISCELLANEOUS
A. HDHPs and Application of Notice 2020-15
Notice 2020-15 provides that a health plan that otherwise satisfies the
requirements to be an HDHP under § 223(c)(2)(A) will not fail to be an HDHP merely
because the health plan provides medical care services and items purchased related to
testing for and treatment of COVID-19 prior to the satisfaction of the applicable
minimum deductible. This notice clarifies that the relief provided in Notice 2020-15
regarding HDHPs and expenses related to testing for and treatment of COVID-19
applies with respect to reimbursements of expenses incurred on or after January 1,
2020. This notice further clarifies that the panel of diagnostic testing for influenza A & B,
norovirus and other coronaviruses, and respiratory syncytial virus (RSV) and any items
or services required to be covered with zero cost sharing under section 6001 of the
Families First Coronavirus Response Act (P.L. 116-127, 134 Stat. 178 (March 18,
2020)), as amended by the CARES Act, are part of testing and treatment for COVID-19
for purposes of Notice 2020-15.

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B. HDHPs and Application of Section 3701 of the CARES Act
Section 3701 of the CARES Act amends § 223(c) of the Code to provide a
temporary safe harbor for providing coverage for telehealth and other remote care
services. As added by the CARES Act, § 223(c)(2)(E) of the Code allows HSA-eligible
HDHPs to cover telehealth and other remote care services without a deductible or with
a deductible below the minimum annual deductible otherwise required by § 223(c)(2)(A)
of the Code. Section 3701 of the CARES Act also amends § 223(c)(1)(B)(ii) of the Code
to include telehealth and other remote care services as categories of coverage that are
disregarded for purposes of determining whether an individual who has other health
plan coverage in addition to an HDHP is an eligible individual who may make tax-
favored contributions to his or her HSA under § 223 of the Code. Thus, an otherwise
eligible individual with coverage under an HDHP may also receive coverage for
telehealth and other remote care services outside the HDHP and before satisfying the
deductible of the HDHP and still contribute to an HSA. The amendments to § 223 of the
Code under section 3701 of the CARES Act are effective March 27, 2020, and apply to
plan years beginning on or before December 31, 2021. This notice provides that
treatment of telehealth and other remote care services under section 3701 of the
CARES Act applies with respect to services provided on or after January 1, 2020, with
respect to plan years beginning on or before December 31, 2021.
Therefore, for
example, an otherwise eligible individual with coverage under an HDHP who also
received coverage beginning February 15, 2020 for telehealth and other remote care
services under an arrangement that is not an HDHP and before satisfying the deductible
for the HDHP will not be disqualified from contributing to an HSA during 2020.

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V. DRAFTING INFORMATION
The principal author of this notice is Jennifer Solomon of the Office of Associate
Chief Counsel (Employee Benefits, Exempt Organizations, and Employment Taxes),
though other Treasury Department and IRS officials participated in its development. For
further information on the provisions of this notice, contact Jennifer Solomon at (202)
317-5500 (not a toll-free number).