COVID-19 and Consumer-Directed Healthcare (CDH): Answers to Your Legal and Compliance Questions

COVID-19 is an unprecedented, once-in-100 years global event, and we’re all learning to navigate it together as we go. Jason Lacey, legal counsel for Alegeus, has provided a list of the most frequently asked legal and compliance questions related to the COVID-19 crisis and consumer-directed healthcare (CDH).

Note: These FAQs have been prepared for Alegeus by Jason Lacey and are made available as a courtesy to Alegeus clients and friends. They are not legal advice from Alegeus to any person or organization and should not be relied on as a substitute for legal advice. Each situation should be evaluated taking into account its specific facts and circumstances.


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Flexible Spending Accounts (FSAs) and Health Reimbursement Arrangements (HRAs)

Can health FSA elections be changed if a member has set aside funds for a procedure that has now been postponed or cancelled due to COVID-19? Does the IRS have a position on this?

Right now, the dates of service should be within the plan year for an FSA. Under current guidance there is, frankly, little flexibility allowing for a change in health FSA elections due to a change in the circumstances regarding a participant’s anticipated medical expenses. The failure to incur anticipated medical expenses is not a change in status or other event that permits an election change. The IRS has not announced any exceptions to this yet.

Is being furloughed a qualifying event that would trigger the ability to make a change to FSA deductions?

Yes, a furlough or other change in employment status that affects FSA eligibility is an event that allows making a change to FSA elections. However, the plan document should be reviewed to confirm whether the furlough results in a change in eligibility. If, for example, the plan document provides for continued eligibility during a furlough or a temporary layoff, there would be no change in status.

Can employers extend the FSA run-out deadline?

Yes, employers can extend the run-out deadline to their preferred length. Current guidance does not specify a maximum length for a run-out period, although it generally should end within a reasonable period after the end of a plan year. Because the IRS recently announced a 90-day extension for federal income tax filing and HSA contributions (until July 15, 2020), a similar 90-day extension of the run-out period would seem to be reasonable. No matter the extension length, however, employers must notify their employees of the change and document the change on the plan document. Read more about extending FSA run-out deadlines here.

Can employers extend the FSA grace period?

No, employers cannot extend the grace period under an FSA for longer than 2.5 months. The grace period can be shorter than 2.5 months but not longer.

Can an HRA plan extend the run-out period?

Yes, as with FSAs, employers can adopt a reasonable extension of the run-out period for HRAs. An extension of up to 90 days would seem to be reasonable. The plan document would have to amended if the run-out period is changed.

What documentation should a plan keep if substantiation requirements are softened?

It is not recommended that substantiation requirements be softened. The IRS has given no indication that HRA or FSA plans will be exempted from the applicable third-party substantiation requirements.

What guidance is available for employees with medical FSAs that have been laid off for an unknown period? Are they allowed to “pause” their deductions and pick back up where they left off when they eventually return? If these employees are gone for 30+ days, do they need to be treated as new employees when they return?

An employee who is indefinitely laid off or furloughed generally will lose FSA eligibility because they are no longer working the hours needed to meet the minimum eligibility requirements of the plan (e.g., 30 or more hours per week). This loss of eligibility generally will trigger a right to elect COBRA coverage under a health FSA, if the employee’s health FSA is “underspent.” If the FSA terms are modified to provide for continued eligibility during the layoff or furlough period, there will be no loss of eligibility and, thus, no right to change the employee’s election. However, if the employee fails to continue paying the cost of coverage his or her coverage generally will end. If eligibility is lost due to a layoff or furlough and the employee is absent for a period of 30 days or longer, the employee generally will be entitled to make a new cafeteria plan election upon return to service, so long as the new election is permitted under the terms of the plan.

Will health FSA coverage continue during a furlough or temporary layoff?

Coverage under a health FSA generally would terminate upon a furlough because the employee is likely no longer working the minimum number of hours required to maintain FSA eligibility. However, it may depend on the plan terms and how the furlough is implemented. For example, if an FSA requires a minimum of 30 hours per week to be eligible and an employee regularly working 40 hours per week (8 hours per day) will be furloughed one day per week, the employee likely will continue to be eligible for the FSA, because the employee is still working 32 hours per week. For a health FSA, COBRA may be available upon a loss of coverage due to a reduction in hours of services. Some dependent care FSAs allow for “spend down” of the FSA balance for qualifying expenses incurred during the remainder of the plan year, even after the participant ceases to be eligible.

With an unpaid layoff/furlough, will participants be able to claim medical expenses incurred during the layoff once they are back to work?

Yes, as long as the plan document is amended to reflect that and all employees are notified and treated the same way. The key is that eligibility for coverage would need to continue through the layoff/furlough.

Dependent Care FSAs

Is there any discussion related to adding greater flexibility to participants in making changes to annual dependent care FSA elections mid-year? As an example, many participants are no longer paying daycare fees due to closures related to COVID-19.

Dependent care FSA elections generally may be changed any time there is a change in the participant’s dependent care expenses. For example, if a participant’s daycare provider closes and the participant is no longer incurring any daycare expenses, the participant has incurred a curtailment of coverage that would permit reducing the participant’s dependent care FSA election. Based on the broad application of the cost-change events in the regulations to dependent care FSAs, plan sponsors and administrators will likely allow dependent care election changes in most circumstances that involve changes in the cost of care (e.g., fee changes, provider changes and changes in the hours of care).

Should an employer get an attestation from an employee for a change in dependent care FSA?

Yes, proof should be requested from employees for any change needed for a dependent care FSA. Ideally, this proof would include third-party documentation to support the requested change, such as a notification from a childcare provider that they are no longer providing services. However, it may be necessary to look at that on a case-by-case basis to cover any extraordinary undocumented events.

Can employers fund a dependent care FSA for more than $5,000 due to COVID-19?

Not under current law. The limit remains $5,000 annually. However, the Employers Council on Flexible Compensation has proposed legislation to increase the amount to $10,000. We are monitoring this proposal and will keep you updated if this legislation passes.

If employees stop contributing to a dependent care FSA, how long are they allowed to submit claims?

Employees can submit claims for dependent care FSA reimbursement up until any funds in the account are exhausted, even if they have stopped contributions. Claims must be submitted during the applicable run-out period. Under most dependent care FSAs, only claims incurred while the employee was actively covered are eligible for reimbursement.

Should we consider pausing dependent care FSA contributions?

This generally would need to be handled on a case-by-case basis, depending on each participant’s circumstances, unless the plan sponsor made a decision to freeze or terminate the entire dependent care FSA plan.

If the daycare center were to subsequently reopen, would an account be “restarted”?

Generally, yes. If a participant again begins incurring qualifying dependent care expenses, the participant would be eligible to change (increase) his or her election to contribute to the dependent care FSA, due to the increased cost incurred.

Health Savings Accounts (HSAs)

Are COVID-19 tests pre- or post-deductible for HDHP members?

The IRS has issued a notice that allows high-deductible health plans (HDHPs) to cover testing and treatment for COVID-19 pre-deductible. This means coronavirus testing and treatment will not prevent an individual from being eligible to contribute to an HSA, even if the coverage is pre-deducible. These expenses are also considered a qualified medical expense under an HDHP, and people can use HSA funds to pay for it.

The IRS and Centers for Medicare & Medicaid Services (CMS), consistent with the coverage requirements implemented under the Families First Coronavirus Response Act, have instructed health plans to offer no-cost testing, and health plans have announced that such tests for those with HDHPs will be pre-deductible so people won’t shy away from testing due to cost.

The tax filing deadline is now July 15, 2020. Does this deadline apply to HSA contributions for 2019?

Yes, the IRS recently confirmed that contributions to HSAs for the 2019 calendar year will be accepted up until July 15, 2020.

If someone makes an HSA contribution between now and the contribution deadline of July 15, can that person choose if it applies to the 2019 or 2020 max?

Yes, employees can contribute to their 2019 HSA up until July 15. They can also contribute to their 2020 HSA.

Can we assume that the ability to request a return of excess contributions to an HSA has also been extended to July 15, 2020?

Yes, the return of excess contributions for 2019 may be requested anytime until the due date of the tax returns for 2019, with extensions.

Over-the-counter expenses and telemedicine

Are over-the-counter (OTC) medications now considered an allowable expense for FSAs and HSAs?

Yes, the CARES Act that was signed into law on March 27, 2020, allows consumers to purchase or receive reimbursement for OTC medications through an HSA, FSA or HRA without regard to whether the medications are prescribed.

What new items are now HSA-, FSA- and HRA-eligible as a result of the CARES Act? When can consumers begin purchasing these new items with their benefits cards?

The CARES Act includes a provision that makes over-the-counter (OTC) medicines and menstrual products HSA-, FSA- and HRA-eligible. On April 15, the Special Interest Group for IIAS Standards (SIGIS) updated its Eligible Product List (EPL) to include OTC items and menstrual care products. Merchants can now update their systems to include the new standards, but adoption dates will vary, as some merchants update their inventory monthly, quarterly or annually. Once a merchant adopts the new standards, consumers can purchase OTC items and menstrual care products through them with a card swipe.

If consumers attempt to purchase these items before systems have been updated and the transaction is denied, they can submit a claim for reimbursement. In addition, this provision is effective for any qualified purchases made after December 31, 2019. Consumers can, therefore, submit claims for reimbursement for purchases made between that date and when this law passed.

For OTC expenses now considered an allowable expense, does this only apply to the current plan year?

Yes, the CARES Act that was signed into law on March 27, 2020, states that this provision is effective only for purchases made or reimbursements of expenses incurred after December 31, 2019. There is currently no sunset on this provision, so it will continue for future plan years, unless modified.

What is eligible today for telemedicine and what may be eligible with the new legislation?-

Prior to enactment of the CARES Act, there was concern that telemedicine coverage for individuals covered under an HSA-compatible high deductible health plan (HDHP) could be disqualifying (preclude HSA eligibility) if access to telemedicine benefits was available on a pre-deductible or low-deductible basis. The CARES Act that was signed into law on March 27, 2020, states that “telehealth and other remote care services” below the deductible will be permitted in an HDHP, thereby preserving HSA eligibility. This provision is effective immediately and will expire for plan years beginning after December 31, 2021. The bill does not specify what “telehealth and other remote care services” entails, but it is anticipated to include the traditional telemedicine consultations that have become more common in the healthcare market in recent years. We will provide updates as we learn more.


Are furloughed employees eligible for COBRA?

Generally, yes. If an employee’s group health plan coverage eligibility is lost as a result of a furlough, they would generally be eligible for COBRA. However, if there is no loss of coverage in connection with a furlough, such as if an employer chooses to temporarily extend eligibility during a furlough, there would be no right to elect COBRA (and, conveniently, no need to elect COBRA). If employers want to provide free or subsidized coverage to furloughed employees who are no longer working sufficient hours to meet the minimum eligibility requirements of the health plan, they should consult with their health plan first.

Transit accounts

If a transit pass is purchased that will expire before an employee returns to work, will their only option be to forfeit the funds, or can they get a refund?

If a transit pass purchased under a qualified transportation plan expires by its terms, the employee generally loses the value of the pass. If the transit provider agrees to refund some or all of the cost of the plan to the transit plan (employer), the refund might be credited to the employee’s account and made available for future transit expenses, so long as the employee continues to be eligible for the transit plan. Funds cannot be cashed out.

Can employees pause contributions to commuter benefits while working from home?

Yes, transit contribution elections can be adjusted prospectively during the year. Employees are allowed to reduce their pre-tax salary reductions for transit benefits to $0 while working from home. If permitted under the transit plan, unused salary reductions may be carried over and used when the employee resumes commuting.

Can unused transit funds carry over to the next year?

Yes, it may be permissible for the plan to retain unused funds and credit them back to the employee’s transit account to be carried forward for future use, so long as the plan terms permit carryover and the employee continues to be eligible for the transit plan.

Plans and Account Funding

Can employees who are uninsured now sign on for health benefits through their employer?

In some cases, yes. Some health plans are adding in special enrollment periods to allow for uninsured individuals to receive coverage during this time.

Can we charge an additional fee for extending run-out deadlines?

This will depend on the terms of the service agreement and whether it permits adjustment of fees in the middle of the term of the agreement. In general, any change to the scope of services would require a modification to the service agreement, which could include negotiating a different fee structure.

Can an employer suspend a plan even while employees are still active?

Generally, yes. If the plan document reserves to the employer the right to amend or terminate a plan at any time, the employer is generally permitted to make any prospective change to the plan it wants, which might include suspending or terminating the ability to incur further claims under the plan. Employees who lose group health plan coverage due to employer action to suspend or terminate the plan generally do not have a right to COBRA coverage under that plan.

Can employers extend the 2019 plan year?

No, the plan year cannot be modified, but an extended run-out can be applied to the plan to facilitate the submission of claims incurred during the plan year.

Do documents need to be amended for employees who have been furloughed or have received reduced hours so they don’t lose eligibility, or will LOA or FMLA language be sufficient?

Generally speaking, plan documents will need to be amended for eligibility to continue during a period of reduced hours or furlough. Such periods generally will not be considered a “leave of absence” and generally will not qualify as FMLA leave. Any time workforce planning initiatives are considered, such as reduced hours, furloughs or layoffs, plan eligibility language should be reviewed to determine whether the changed work status will continue to satisfy plan requirements.

How will consumers respond to the crisis from a spending perspective?

Workplace closures and social distancing measures will impact how consumers use their accounts and debit cards. Consumers will forgo trips to physical retailers or service providers. The industry should expect an increase in card transactions at online pharmacy, retail and medical device suppliers.

Legislative developments

How does the $2 trillion stimulus bill (known as the CARES Act) affect consumer-directed healthcare?

Read our blog post here.

What are the contents of ECFC’s proposal to the Senate’s Finance Committee related to consumer-directed health plans?

Read our blog post here.

How does the Families First Coronavirus Response Act (FFCRA) impact spending accounts?

The FFCRA generally does not impact spending accounts, although there could be limited exceptions.

The FFCRA requires first-dollar coverage of coronavirus testing and related services. To the extent a non-excepted HRA with a deductible or other cost sharing is being used to cover this expense, the cost-sharing would need to be removed—although more likely this expense will be fully covered by the primary plan and thus will never reach the HRA.

The FFCRA also allows covered employers (private sector employers with fewer than 500 employees) to claim a payroll tax credit for employer medical care coverage expenses allocable to mandated paid leave amounts. This could theoretically include employer HRA contributions and any employer health FSA contributions. However, it is unclear at this time how those contributions would be “allocated” to mandated paid leave amounts. Absent guidance to the contrary, employee contributions to an FSA apparently would not be eligible for the tax credit.

Read about the FFCRA here.

Impact to Your Business

What risks are posed to my business as a TPA?

COVID-19 creates new risks for your business. Employer solvency issues can lead to major financial and collection risks for your organization, as well as potential fiduciary exposure. It is very important that you understand the significant risks this poses for your business – not just due to lost PAPM fees in the event of employer reductions-in-force or bankruptcies, but also because you as the administrator may ultimately be responsible for any missed or failed account contributions. Careful monitoring of employer claim funded is recommended during this uncertain economic period.

Have there been any separate rules for non-profit employers?

Not at this time.

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