iAs noted in our prior blog post, the Consolidated Appropriations Act, 2021 (the Act) includes several types of relief for flexible spending accounts (FSAs), impacting both health FSAs and dependent care FSAs. The FSA relief provisions in the Act address a concern raised frequently by employees and employers in 2020 — must employees forfeit their remaining 2020 FSA funds based on the rules that normally apply to FSAs under the Internal Revenue Code (the Code), given that, due to the COVID-19 pandemic, many employees’ actual 2020 health and dependent care expenses were significantly less than employees anticipated when they elected FSA coverage for 2020?
The FSA relief provisions are optional — employers may choose to implement some, all, or none of the relief based on the current terms of an employer’s FSA program and the particular issues facing an employer’s FSA participant population. In addition, there are still many open questions about how the Internal Revenue Service (IRS) will interpret and enforce certain portions of the relief. As we await additional guidance from the IRS, now is a good time for employers to review the permitted relief outlined below, consider whether the employer may want to adopt any of these changes, and begin discussions with the FSA administrator and legal counsel about the steps that would be required to implement the relief.
FSA Relief Permitted by the Act:
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FSA Carryovers. Employers can amend health FSAs and dependent care FSAs to allow participants to carry over (1) their remaining FSA balances at the end of the plan year ending in 2020 for use in the subsequent 2021 plan year, and/or (2) their remaining FSA balances at the end of the plan year ending in 2021 for use in the subsequent 2022 plan year.
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FSA Extended Grace Periods. Employers can amend health FSAs and dependent care FSAs to extend the FSA grace period with respect to unused FSA balances to 12 months (1) following the last day of the plan year ending in 2020, and/or (2) following the last day of the plan year ending in 2021.
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Health FSA Spend-Downs. Employers can amend health FSAs to allow participants whose health FSA coverage terminates during 2020 or 2021 (e.g., due to termination of employment) to continue to receive reimbursements from their unused health FSA balances for the plan year for eligible health care expenses incurred through the remainder of the plan year and during any applicable grace period. (The Code already permits dependent care FSAs to incorporate this type of spend-down feature.)
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Dependent Care FSA Special Rules for Dependents Who Aged Out During the Pandemic. Employers can amend dependent care FSAs to allow participants who elected dependent care FSA coverage for the 2020 plan year during an enrollment period that ended on or before January 31, 2020, and whose dependent child(ren) turned age 13 during the 2020 plan year, to continue to use their dependent care FSA funds for the child’s expenses through the end of the 2020 plan year. In addition, if there is still a balance remaining in the participant’s dependent care FSA at the end of the 2020 plan year, the participant may use that balance for the child’s expenses into 2021, until the child reaches age 14.
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FSA Mid-Year Election Changes in 2021. For plan years ending in 2021, employers can amend health FSAs and dependent care FSAs to allow prospective mid-year election changes for any reason (i.e., without regard to whether the participant experiences a change in status event that would otherwise permit an election change under the Code).
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Retroactive FSA Amendments. The Act permits employers to adopt amendments to implement the optional FSA relief with retroactive effect, as long as (1) the amendment is adopted by the last day of the first calendar year that begins after the end of the plan year in which the amendment is effective (e.g., December 31, 2021 for changes effective during the 2020 plan year for calendar year FSA plans); and (2) the FSAs are administered in accordance with the terms of the amendment beginning on the amendment’s effective date.
