Flexible Spending Account Relief Adopted by the IRS in 2020 Extended Under the Consolidated Appropriations Act of 2021
The Consolidated Appropriations Act of 2021 (“CAA”) extended the relief provided to health care and dependent care flexible spending accounts under IRS Notice 2020-29 for the 2021 and, in some cases, 2022 Plan Years. This relief was largely expected and essentially extended the rules provided by the IRS under IRS Notice 2020-29. For example, under the Notice, a Health Care and Dependent Care flexible spending account (“FSAs”) could extend the normal 2 ½ month grace period for the 2020 Plan Year until December 31, 2020. Without this extension, the unused FSA contributions at the end of the 2019 Plan Year would have expired on March 15, 2020. The Notice also allowed participants to make prospective mid-year election changes in 2020, without regard to whether they experienced a change in status event.
As explained in greater detail below, the CAA largely adopts these same rules and simply extends them to the 2021 Plan Year. Keep in mind that some of these exceptions also apply for the 2022 Plan Year. Finally, all these provisions are optional and plans can choose to adopt some or all of the relief discussed below.
- Carryovers permitted for Plan Years ending in 2020 and 2021
The IRS Code permits Health Care FSAs and Dependent Care FSAs to allow participants to carryover a limited amount of unused funds to the upcoming Plan Year. The funds that are carried over can continue to be used to eligible medical expenses. The carryover limit is subject to annual IRS index, and was set to be $550.
However, for Plan Years ending in 2020 and 2021, Plans can lift this cap and allow participants to carryover a higher amount of unused expenses. The only limit is that the carryover amount plus the annual contribution cannot exceed the annual IRS contribution limit (i.e., $2,750 for 2021).
That means FSA amounts that are unused at the end of 2020 can be carried over to 2021 and applied to 2021 medical expenses for that entire year. Similarly, any FSA amounts remaining at the end of the 2021 Plan Year can also be carried over and applied towards 2022 medical expenses. This includes medical expenses for the participant and his or her spouse and dependents.
- Grace Period Extension Allowed for Plan Years ending in 2020 and 2021
For Plan Years ending in 2020 or 2021, the CAA permits Health Care FSAs and Dependent Care FSAs with a grace period to extend that grace period to 12 months after the end of the Plan Year. That means, instead of 2 ½ months, the unused portion for 2021 can be applied during the entire 2021 Plan Year and the any unused portion following the end of the 2021 Plan Year can be applied for the entire 2022 Plan Year.
Example: Tyson is a participant in a Health Care FSA that includes the normal 2 ½ month grace period rule. Since Tyson’s Plan is a calendar year Plan, that means Tyson must use the unused amount by March 15th of the year following the end of the Plan Year. However, under these rules, Tyson’s Plan can extend the grace period to December 31st for the 2021 and 2022 Plan Years.
- Terminated Participants can be Reimbursed Through the end of the Plan Year
The CAA also allows FSAs to reimburse terminated participations for expenses incurred through the end of the plan year in which the participant ceased participation. To qualify, the participation must have terminated employment in the 2020 or 2021 calendar year. This change only affects Health Care FSAs. Dependent Care FSAs were already permitted to reimburse eligible expenses incurred through the end of the plan year in which the participation ceased participation.
- Permitted FSA Election Changes for Plan Years ending in 2021
Under the CAA, FSAs may permit a participant to modify his or her elected FSA contribution on a prospective basis (subject to the IRS maximum dollar limitations for the 2021 year) for any reason whatsoever. The Participant does not need to have experienced a change in status or other qualifying event to make this change.
This change coincides with the relief the IRS provided for mid-year changes during the 2020 year under IRS Notice 2020-29.
Example: Marco is a participant who elected to contribute $800 to his FSA for the 2021 Plan Year. Since Marco’s plan is a calendar year plan, that means his election begins on January 1, 2021. Marco’s $800 FSA election was made in accordance with IRS regulations and before the beginning of the 2021 Plan Year. In May of 2021, Marco realizes that his FSA contribution is too low. Marco wishes to have an extra $300 contributed to his FSA for the 2021 Plan Year.
Under the CAA, the Plan may allow Marco to amend his FSA contribution on a prospective basis.
Example: Janice is also a participant in the same calendar year plan as Marco. She elected to contribute $600 to her FSA for the 2021 calendar year. In May of 2021, she realizes that this FSA contribution is too high. Janice wishes to have no further FSA contributions made from her payroll.
Under the CAA the Plan may allow Janice to amend her FSA contribution on a prospective basis.
Takeaway
COVID-19 has impacted thousands of people in profound ways. When it comes to health insurance decisions, especially FSAs, this includes everyone; from those who have been infected, have had loved ones infected, or have experienced employment changes due to the pandemic. The relief extended under the CAA allows plans to adopt rules which recognize these difficulties and allow participants to modify elections that have significant financial implications. That includes participants that want to reduce their contribution (thereby increasing their take home pay) and those who want to increase it (therefore receiving greater tax-free reimbursements for medical expenses). Plans looking to adopt this relief will have to be amended and should clearly communicate the changes to participants.