New Relief for Flexible Spending Accounts in Consolidated Appropriations Act, 2021
The Consolidated Appropriations Act, 2021 (“CAA”), which became law on December 27, 2020, provided new relief for Health Flexible Spending Accounts (“Health FSAs”) and Dependent Care Flexible Spending Accounts (“Dependent Care FSAs”) (collectively, “FSAs”). Many of the CAA’s provisions increased the flexibility of the Section 125 cafeteria plan rules that govern FSAs in response to the COVID-19 pandemic.
The CAA’s COVID-19 relief provisions allow, but do not require, employers to make the following changes to Health and Dependent Care FSAs:
- 2020 and 2021 Plan Year Carryovers. For plan years ending in 2020 and 2021, a Health FSA and Dependent Care FSA may allow a participant to carryover the entire unused account balance to the next plan year. The carryovers must be administered under the same rules that apply to carryovers for Health FSAs (except for the maximum carryover amount). Notably, the carryover, which is typically only a permissible option for Health FSAs, will be temporarily allowed for Dependent Care FSAs (that don’t offer a grace period), and the maximum carryover amount for these two plan years will not be limited to $550.
- Extended Grace Periods. For any FSAs with plan years that end in calendar year 2020 or 2021, the grace periods for those plan years for both Health FSAs and Dependent Care FSAs may be extended for up to 12 months after the end of the plan year. So, for example, a grace period ending on March 15, 2020 can be extended to December 31, 2020. Similarly, a grace period ending on March 15, 2021 can be extended to December 31, 2021.
- Spend Down of Medical and Dependent Care Expenses After Termination of Participation. Before the CAA, some employers permitted employees to “spend down” the balance in their Dependent Care FSAs after the employee terminated participation in the Dependent Care FSA for the remainder of the plan year in which the employee terminated participation in the Dependent Care FSA. This allowed participants to use their Dependent Care FSA to pay for qualifying dependent care expenses incurred after the employee terminated participation in the Dependent Care FSA through the end of the plan year. This situation may occur, for example, when an employee terminates employment with the employer before the end of the plan year.
Under the CAA, the spend down option is now available for Health FSAs for calendar years 2020 and 2021, including any applicable grace period (which may be extended by the CAA). Previously, employees needed to elect COBRA continuation coverage under the Health FSA to continue participation through the end of the plan year in which the employee terminated participation in the Health FSA. The spend down for Health FSAs must be administered under the same rules that currently apply to spend downs for Dependent Care FSAs. If the employee wants access to his or her full Health FSA election (not just the balance), the employee must elect COBRA, if eligible.
- Special Rule for Dependent Care FSA Where Dependent Aged Out of Coverage During Pandemic. Generally, a Dependent Care FSA can only be used to pay for or reimburse dependent care expenses of a dependent child who is under the age of 13. For a plan year in which the annual open enrollment period ended on or before January 31, 2020, the Dependent Care FSA can be used to pay for or reimburse dependent care expenses of a dependent child who is under the age of 14. In addition, if the employee had an unused account balance at the end of that plan year (and the Dependent Care FSA provides a grace period or, under the CAA, a carryover), expenses incurred by dependents who are under the age of 14 may be reimbursed in the next plan year, but only to the extent of the unused balance.
For example, assume that an employee enrolled in a Dependent Care FSA for the 2020 calendar year. If that employee had a dependent who turned 13 on September 1, 2020, the employee could no longer use the employee’s Dependent Care FSA to pay for dependent care expenses incurred by that dependent after August 31, 2020. Under this change, for 2020, the employee can still use the employee’s Dependent Care FSA to pay for dependent care expenses incurred by that dependent for the remainder of the 2020 calendar year. If the Dependent Care FSA allowed the employee to carry over unused account balances to 2021 (by a grace period or carryover feature), the employee could use the unused account balance from 2020 (but not new contributions made in 2021) to pay for dependent care expenses incurred by this dependent until August 31, 2021, which is the day before the dependent’s 14th birthday.
- Mid-Year Election Changes During the 2021 Plan Year. Similar to the relief under IRS Notice 2020-29 for plan years ending in 2020 (see our previous client alert here), for plan years ending in 2021, an employer may permit employees to change their pre-tax contributions to a Health FSA or Dependent Care FSA for any reason. However, the election change must be prospective, and participants may not elect to decrease the annual contribution amount below the amount which they have already been reimbursed for the 2021 plan year. Also, participants may not decrease their election to receive a refund of amounts already contributed to their Health FSA or Dependent Care FSA.
- Plan Amendments. Amendments for any of the above changes may be adopted retroactively as long as: (1) the amendment is adopted by the last day of the first calendar year beginning after the end of the plan year in which the amendment is retroactively effective; and (2) the plan is operated during the period before the amendment is adopted consistent with the amendment. For example, for a Health FSA and Dependent Care FSA with a calendar year plan year, an amendment that is retroactively effective in the 2020 plan year must be adopted by December 31, 2021.
The CAA expanded the flexibility of Health FSAs and Dependent Care FSAs in response to the COVID-19 pandemic. Employers that wish to implement any of the changes should consult with their third party administrators as soon as possible to confirm their ability to implement the changes. In addition, employers should notify plan participants as soon as possible to allow the participants an opportunity to take advantage of the changes, especially participants who may have already made election choices for the plan year before knowing about the changes.
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.