Medcom is getting a lot of questions regarding Flexible Spending Accounts, and other tax-advantaged benefit plans, and mid-year changes. We are here to provide additional clarification in a time when that seems hard to find. We are certainly in unusual territory, and the situation and changes with the IRS are fluid.
To date, we still have not seen that the IRS has allowed for any new mid-year election changes to FSA's in light of the coronavirus or any changes to grace periods or rollovers. Under the existing rules, the Plan Administrator generally has the right to amend the plan at any time; however, amendments affecting the grace period or rollover must be completed before the end of the plan year. Also, under the current rules, the employer cannot return unused money to the employee. However, employers can distribute funds amongst all participants. Remember, employers can always give employees bonuses separate from the plan on a post-tax basis, for any reason.
The employer always has a risk; however, we believe that the rules will be overlooked to a certain extent this year. We have not been able to get any clarification from the IRS, but we do know certain regulatory compliance events may be waived. When you look at situations on a case by case basis and see that an individual had appointments canceled, which is beyond their control, we believe, but cannot guarantee, that the IRS will eventually come up with some form of discretionary enforcement. These are unprecedented times, and we think employers can consider reasonable circumstances and solutions but know there is always a risk that the IRS will not agree.
The IRS recently came out with its People First Initiative. The IRS stated the purpose is "to help people facing the challenges of COVID-19 issues." They announced on March 25, a sweeping series of steps to assist taxpayers by providing relief on a variety of issues ranging from easing payment guidelines to postponing compliance actions." Read the initiative here.
While "People First" doesn't specifically address FSAs at this time, the sentiment is there. Therefore, we always recommend employers consider the current situation, the risk they are willing to assume, and the participant's unique situation. Any employer that chooses to "bend the rules" in any way should plan to demonstrate the following:
- All of the actions taken were in the best interest of participants
- Not designed to circumvent the payment of owed taxes
- Were applied in a fair (i.e., nondiscriminatory) way
- Were reasonable
Checking these boxes helps ensure the best possibility of success, though no guarantee, in the event there is a participant complaint and/or an IRS challenge to the employer's decision.
As much as we'd like to guarantee the IRS will be lenient and understanding, there is no way to know what the future will hold. Be assured that Medcom is continuously monitoring the situation and the shifting laws and will be here to answer your questions.
Please submit any questions related to COVID-19, employee benefits, changing laws, etc., to covid19questions@medcombenefits.com. Tune in to our Desktop Discussion today at 3 p.m. to hear the latest answers and updates from our Senior Legal Counsel, Michelle Barki.
