The IRS recently issued Notice 2020-33
to increase the carryover limit (currently $500) for health FSAs. The notice also clarifies that health plans and individual coverage health reimbursement arrangements (HRA) may reimburse health insurance coverage premiums incurred prior to the beginning of a plan year for coverage provided during the plan year.
For health FSAs, the amount that can be carried over from one plan year to the next is increased to an amount equal to 20% of the maximum salary reduction contribution amount for cafeteria plans under Section 125(i) for that plan year. For example, the maximum unused amount from a plan year starting in 2020 allowed to be carried over to the immediately following plan year beginning in 2021 is $550 (20% of $2,750, the indexed 2020 limit under Section 125(i)).
The plan terms for a health FSA must be amended to reflect the increased carryover limit. Under the general amendment timing rules, an amendment would have to be adopted on or before the last day of the plan year from which amounts may be carried over and may be effective retroactively to the first day of the plan year, provided the employer informs all eligible employees of the changes to the plan. However, the notice includes a special amendment timing rule for the 2020 plan year, which provides that such amendments must be adopted on or before Dec. 31, 2021.
Health plans, including a premium-reimbursement plan in a cafeteria plan or an individual coverage HRA, are also permitted to treat an expense for a health insurance coverage premium as incurred on:
- The first day of each month of coverage on a pro rata basis
- The first day of the period of coverage
- The date the premium is paid
For example, an individual coverage HRA with a calendar plan year may immediately reimburse a substantiated premium for health insurance coverage that begins on Jan. 1 of that plan year, even if the covered individual paid the premium for the coverage prior to the first day of the plan year.
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