Consolidated Appropriations Act of 2021: Temporary Special Rules for FSAs
Senior Compliance Attorney
One of the provisions of the Consolidated Appropriations Act of 2021 includes temporary special rules for Health and Dependent Care Flexible Spending Arrangements (known as flexible spending accounts or FSAs) which expand on previous rules. The rules are designed to provide additional flexibility due to the ramifications of the COVID-19 pandemic. The additional relief includes:
FSAs are typically subject to a “use it or lose it” rule which requires participants to use funds in the FSA by the end of the plan year. Previous guidance allowed cafeteria plan sponsors to implement a “carry over” provision for Health FSAs that would allow participants to carry over a maximum amount to use in the next plan year ($550 2021; $560 2022).
The new legislation temporarily allows cafeteria plan sponsors to permit participants to carry over any unused benefits or contributions remaining in Health FSAs AND Dependent Care FSAs at the end of plan years 2020 and 2021 into subsequent plan years ending in 2021 and 2022 respectively.
Grace Period Extensions
Currently, Health or Dependent Care FSAs may allow for a 2 ½ month grace period following the end of a plan year. During this period expenses may be reimbursed from the previous plan year. Health FSAs that have a carryover provision may not also include a grace period.
The new legislation allows cafeteria plan sponsors to temporarily extend the grace periods for plan years 2020 and 2021 to 12 months after the end of each plan year. This is done with respect to unused benefits or contributions remaining at the end of the respective plan year.
Dependent Care Age Limit
Dependent Care FSA reimbursements currently cease when a dependent child reaches the age of 13. During the pandemic, if a dependent child reached the age of 13 during the plan year many participants had left over funds.
The legislation allows for a cafeteria plan that has a dependent care FSA with an enrollment period that ended by January 31, 2020 (recent plan year) to allow reimbursements of expenses through the end of the plan year or through the next plan year during which the child attains the age of 14. Reimbursements are limited only to the unused balance from the prior year.
Post-Termination Health FSA Reimbursements
The new legislation now permits cafeteria plan sponsors of Health FSAs to allow employees who cease participation in the plan during calendar year 2020 or 2021 to continue to receive reimbursements from unused benefits or contributions through the end of the plan year in which such participation ceased, including any grace period and allowable modification of such grace period. Although not entirely clear, this provision potentially eliminates the need for a former employee to elect and pay premium for COBRA for the Health FSA.
Mid-year Election Changes
Typically, Health and Dependent Care FSA participants must experience a “qualifying event” in order to make election changes during the plan year.
The legislation allows cafeteria plan sponsors to temporarily allow prospective mid-year election changes to Health and Dependent Care FSAs for plan years ending in 2021 without a “qualifying event”.
All allowable changes for Health and Dependent Care FSAs are permissible and not required. Cafeteria plan sponsors may choose to adopt all, some or none of the changes. If the cafeteria plan sponsor chooses to adopt changes, plan documents must be amended by the last day of the first calendar year beginning after the end for the plan year in which the amendment is effective.
For instance, calendar year plans must adopt 2020 amendments by December 31, 2021 and 2021 amendments by December 31, 2022. Changes to the Health FSA or Dependent Care FSA may apply retroactively. However, the actual election changes may only be prospective.
The temporary easing of the rules for Health and Dependent Care FSAs are designed to allow users of these accounts relief due to the COVID-19 pandemic. Employers should work with their FSA administrators to implement all appropriate changes.