Good Things Come to Those Who Wait, Potential New Guidance from the IRS on Health and Dependent Care Flexible Spending Accounts
We understand that the IRS intends to issue guidance on the various flexible spending account (“FSA”) changes permitted by the Consolidated Appropriations Act, 2021 (“CAA”) (see our previous client alert here).
The CAA’s COVID-19 relief provisions allow, but do not require, employers to make changes to health and dependent care FSAs, such as allowing temporary unlimited carryovers, temporary extended grace periods, and the temporary “spend down” of a health FSA after termination of participation, among other changes. Since the CAA gives employers time to amend their Section 125 cafeteria plans to adopt changes permitted by the CAA, employers may want to wait until the IRS issues this guidance before formally amending their Section 125 plans.
Amendments for any of the plan design changes permitted by the CAA must be adopted (i.e., signed) by the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective. For example, for a health and dependent care FSA with a calendar year plan year, an amendment that is retroactively effective to the 2020 plan year must be adopted by December 31, 2021. In addition, the plan must be operated during the period before the amendment is adopted consistent with the amendment.
Employers that wish to implement the relief offered for FSAs under the CAA may want to wait for the anticipated guidance from the IRS before adopting the required plan amendment. Employers should consider preparing plan amendments now, but there may be benefits to waiting to sign the amendment. Preparing the amendment now will help the employer administer their FSAs consistent with the amendment. But by taking a “wait-and-see” approach, employers may avoid having to re-amend their Section 125 plans later.
If you have any questions about the changes permitted under the CAA, or need assistance with any employee communications or plan amendments, please contact the authors or one of the Miller Johnson employee benefits attorneys.