IRS Increases Employer Health Insurance Plan Flexibility - SmartAsset

The COVID-19 pandemic continues to impact many working Americans. Whether they contract the disease themselves, are responsible for the care of someone with the virus, or have had their employment or finances impacted by the economic fallout, there are many questions about how employer health plans will help support these individuals. To help out, the IRS has given employers permission to let employees make changes to their company health plans during COVID-19. Here’s how.

New Rule: Employer Health Insurance Elections

On May 12, the IRS announced several changes to rules about employer-based health insurance. First, employers can let their workers drop out of their health insurance if they have an alternative option. Employees may also sign up for health insurance if they failed to do so earlier in the year or during their open enrollment period. Additionally, workers may now switch plans mid-year as a result of this ruling.

These changes do not require employers to offer health insurance plans or require them to allow employees to switch plans. Employers must opt-in if they want to give their employees this additional flexibility. A survey by consulting firm Mercer of 279 employers found that as of early June only 8% of employers will allow workers to switch to a different plan, only 11% will allow enrolling in a plan after they have waived coverage and 10% will permit the addition of a dependent to a plan.

What This Rule Means for You

Although these new rules do not require employers that did not previously offer health insurance to do so, the expansion will allow workers to add family members to their plan. Workers may also switch from one workplace healthcare plan to another at any time. Finally, those previously uninsured through their employer may now opt in to insurance. This is extremely helpful for people whose employment, health, or family’s employment or health have been impacted by the global pandemic.

For example, let’s say you were previously the only person in your family on your employer’s health insurance plan, but your spouse was on their workplace’s plan. If your spouse lost their job, you could add them to your workplace health insurance plan under the new rules. If your kids were on your spouse’s plan, you’d be able to add them to your plan as well and change which plan you were on previously based on your family’s needs.

Additionally, this change means that employees have much more peace of mind when going to work. Many people were hesitant to go to their workplace in anticipation of potentially exposing themselves to the virus, especially if they didn’t have health insurance. Now, people are able to sign up for health insurance mid-year – an option that wasn’t available until now.

New Rule: FSA Disbursements

The May 12 announcement also allows people with flexible spending accounts (FSA) to apply any unused amounts to pay for or reimburse medical care expenses and healthcare for their dependents.

Normally, FSAs have strict rules on how and when to spend the money. Most of the time, employees choose in the fall how much money will go into their FSA in the following calendar year. The money is taken from the employee’s paycheck as pre-tax income and is to be used the following year on medical expenses. Many plans have a rule that the money expires at the end of the year. If employees don’t use the money, it does not carry over into the account the following year, although some companies allow up to $500 to roll over into the following year.

Now, up to $550 of unused FSA funds from 2019 can be carried over and used anytime in 2020, including up to Dec. 31. Also, you now have a grace period in which to incur claims for reimbursement. This grace period allows participants to incur claims until March 15 of the following plan year. Unused funds will be forfeited.

The Mercer survey found that 43% of surveyed employers will allow changes in contributions to a dependent care FSA and 29% will let employees change contributions to a health care FSA.

Key Considerations

With the new rule, people can change how much they want to contribute to their FSA mid-year. Therefore, employees who are eligible through their employer for FSA accounts may sign up for an FSA account, increase or decrease their contribution, and use the money in new ways.

For example, let’s assume that you were not contributing to an FSA before COVID-19. However, you now have more child care expenses and medical expenses. Since an FSA is a tax-advantaged account, you decide it’s a good idea to start one to help pay for your expenses. You kept your job, but your kids are not going to school, so the cost of child care is high. Therefore, you start an account and use it to help cover the cost of child care while you are at work.

Continuing this example, let’s assume that your kids are going back to school in the fall. You may choose to decrease your contribution to your FSA at that time. Previously, account holders couldn’t do this, but the new changes have enabled your family to weather the storm of COVID-19 more confidently.

The Bottom Line

COVID-19 has made clear that pre-planning your medical expenses for an FSA is not an exact science. Additionally, people’s needs change throughout the year, thus necessitating more flexibility on health insurance elections. The IRS has made both FSA and health insurance elections more flexible, and therefore more accessible to many Americans. While companies have to opt-in to these more flexible programs, the IRS hopes that these changes allow more people to get the employer support they need.

Tips for Understanding Health Insurance

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