Coronavirus surprise: IRS allows midyear insurance and FSA changes

The economic upheaval and social disruption caused by the coronavirus pandemic have upended the assumptions many people made last fall about which insurance plan to sign up for, or how much of their pretax wages to sock away in health or dependent care flexible spending accounts.

You may find yourself in a high-priced health plan you can no longer afford because of a temporary pay cut, unable to get the medical care you might have planned and budgeted for, or not sending the kids to day care. Normally you'd be stuck with the choices you made unless you had a major life event such as losing your job, getting married or having a child. But this year, things may be different.

Last month, the Internal Revenue Service announced it would let employees add, drop or alter some of their benefits for the remainder of 2020. But there's a catch: Your employer has to allow the changes.

The new guidance applies to employers that buy health insurance to cover their workers as well as those that pay claims on their own, called self-insuring. It's unclear how many employers will take advantage of the new flexibility to offer what amounts to a midyear open enrollment period. If you're wondering what your company will do, ask.

"If a consumer finds themselves economically strapped and their finances have changed, and they're in a situation where they really would like to rethink their coverage, they may want to approach their employer and see if they're planning to adopt any of these changes," said Jay Savan, a partner at human resources consultant Mercer.

Some health care policy experts are unimpressed with the new coverage options, noting that earlier this spring the Trump administration opted not to create a special enrollment period for uninsured workers to buy subsidized health insurance on the Affordable Care Act's health insurance marketplaces.

"It's not likely that many people will take up this new coverage opportunity, and it won't address the problem of lack of coverage that many people are facing," said Sabrina Corlette, a research professor at Georgetown University's Center on Health Insurance Reforms.

Assuming you still have employer-sponsored coverage, here are examples of circumstances workers may face and what the IRS changes could mean for them.

You want to switch to a cheaper plan to put more money into savings during these uncertain times. Can you do that?

If your employer decides to allow it, you can.

One consideration: If you switch plans midyear, you may have to start all over again paying down your deductible and working toward reaching your annual out-of-pocket maximum spending limit for the year, said Katie Amin, a principal at Groom Law Group in Washington, D.C., a firm specializing in health care and benefits.

"Some employer plans would credit you under the new option if you switched plans," Amin said. "It depends."

You've got a high-deductible plan and are worried about high medical bills if you get COVID-19. Can you switch to a plan with more generous coverage?

The IRS guidance allows it, but your employer probably won't, say experts. It's impossible for workers or their bosses to know who will develop COVID-19. But the concern among employers is that people willing to pay more for generous coverage may be sicker and have higher health care costs than other workers, and could therefore cost the plan more, a phenomenon called adverse selection.

In addition to evaluating whether employees could benefit from midyear changes, an employer will weigh financial considerations, said Steven Wojcik, vice president of public policy at the Business Group on Health, which represents large employers.

They'll ask, "What is the adverse selection risk, and what is going to be the uptake [in coverage] if you open up enrollment?" he said.

Under the new rules, if you haven't had health insurance on the job before but would like to sign up now, you can do that, too, if the employer decides to permit it.

What if one spouse gets laid off but the other is still employed? Can the couple switch their family coverage to the employed spouse's plan?

Yes. But this was already allowed before the new IRS guidance came out. Under long-standing rules, if workers' life circumstances change they're entitled to change their coverage during the year.

Can you drop your employer coverage altogether?

Yes, if your employer permits it. Normally, once you sign up for health insurance through your employer and agree to have your premiums deducted from your paycheck, you can't drop coverage during the year unless you experience a qualifying life event. Under the new IRS rules, you can drop your coverage, but only if you replace it with another form of comprehensive coverage such as through a health insurance exchange or Tricare, the military health insurance program.

One thing that won't qualify as comprehensive coverage: a short-term plan, said Amin. The Trump administration has encouraged the adoption of limited-duration plans with terms that can last for nearly a year. They don't typically cover preventive care or preexisting conditions, and renewal is not guaranteed.

You've put thousands of dollars into a flexible spending account to cover day care expenses this year, but now the kids are home full time. Can you change the amount?

Yes, but once again this is allowed only if your employer agrees to it. Likewise, if you want to increase your pretax contribution because you need to hire someone to care for your kids at home while you work, you can do that, too. You can also establish a new flexible spending account for dependent care expenses in 2020 if you don't already have one.

Employees are legally entitled to put up to $5,000 annually into a dependent care FSA to pay for day care, preschool, after-school programs or summer camp.

"Since it's the employees' money, my guess is employers will allow them to make changes," said David Speier, who is in charge of the benefit accounts group at human resources consultant Willis Towers Watson.

You planned to use money left over in last year's FSA to cover the cost of a medical procedure in early March. But that was postponed because of the coronavirus and you've missed the March 15 deadline for using those funds. Do you have any recourse?

Under the new IRS guidance, employers can opt to extend the grace period for using leftover 2019 FSA funds through the end of 2020. Typically, those funds would have disappeared under "use it or lose it" rules if they hadn't been used by March 15. In 2019, the maximum pretax contribution to a health care FSA was $2,700; this year it's $2,750.

Similar to the changes now permitted for dependent care FSAs, employers can also decide to permit workers to prospectively decrease or rescind their elected health care FSA amounts altogether.

If you decide to stop contributing to your FSA, you can spend down the money that's accumulated there on health care expenses, but you can't cash out the account, said Amin. For example, if you've accumulated $500 in your FSA, you can use that money for eyeglasses or other approved expenses through the end of the year. But your employer can't give you the $500 outright, essentially cashing out the account.

Employers have expressed a lot of interest in implementing the flexible spending account changes, said Mercer's Savan.

"We expect them to have a lot of traction," he said.