The Consolidated Appropriations Act, 2021, H.R. 133 (the “CAA”) signed into law by the President on December 27, 2020 and a variety of IRS guidance issued in the first week of 2021 mean that employers entering the new year have lots of COVID-19 relief to digest. This Alert is the first part of our three-part series focusing on COVID-related changes affecting employers and their employee benefit plans. Here we focus on flexible spending accounts.
FSAs Can Allow Longer Carryovers & Grace Periods
Plan sponsors may choose to amend their flexible spending account (“FSA”) plans to allow employees to carry over any unused FSA balances from the 2020 plan year into the 2021 plan year and to carry over any unused balances from the 2021 plan year into the 2022 plan year. Under the FSA rules, employees must incur eligible expenses by the end of the plan year or forfeit any unused amounts (i.e., “use-it-or-lose-it”). As an exception, FSA plans may permit employees to carry over a limited amount to be used for expenses incurred in the following plan year ($550 for amounts carried over from the 2020 to 2021 plan year). Due to remote learning, day care closures, working from home, etc... during the pandemic, many employees had more than $550 in unused amounts in their FSAs at the end of 2020, so this change allows additional time to use up those funds.
Plan sponsors may choose to extend the 2020 and 2021 FSA grace periods (to spend unused amounts in the following plan year) until 12 months after the applicable 2020 or 2021 plan year ends. Some FSA plans permit an extended period of coverage at the end of each plan year to provide employees with additional time to incur eligible expenses and use any remaining amounts in the FSAs after the end of the plan year. This grace period is normally 2.5 months following the end of the plan year (March 15), so this extension offers considerably more time.
Plan sponsors may allow employees who ceased or will cease participation in an FSA during the 2020 or 2021 plan years to continue to incur eligible expenses and use any remaining amounts in their FSAs through the end of the plan year during which the employee ceased participating in the FSA (including any grace period). For example, if the employee terminates employment on June 1, 2021 with an outstanding dependent care FSA balance of $500, the employee could be permitted to continue to pay for day care costs incurred after June 1 and use up those funds through December 31, 2021 (plus any grace period).
Plan sponsors should take note that FSA plans cannot include both a carryover and a grace period extension feature. Plan sponsors should also keep in mind that employees are prevented during any health FSA carryover or grace period from contributing to a health savings account (HSA). In order to maintain flexibility for employees who may wish to move to an HDHP/HSA arrangement at year-end, plan sponsors offering a carryover or grace period may find it beneficial to convert the health FSA of such an employee to a limited-purpose health FSA or in the case of carryovers, permit a waiver by the employee.
Children Turning 13 in 2020 Can Remain Eligible for Dependent Care
Plan sponsors can choose whether to increase (temporarily) the age limit for a dependent to qualify as an “eligible dependent” for purposes of determining reimbursable costs under a dependent care FSA from age 13 to 14. This temporary age increase is only available for dependents who attained age 13 during the 2020 plan year (and applies during the subsequent plan year if the applicable employee had unused amount in the dependent care FSA at the end of the 2020 plan year). Since most plans incorporate the Internal Revenue Code definition of dependent, this change will likely automatically apply unless the plan sponsor takes action to amend its plan to prevent this change from applying.
Prospective Changes to FSAs Are Allowed For Any Reason
For plan years ending in 2021, plan sponsors may allow employees to change their FSA contributions for any reason. Under this temporary relief, employees are not required to first have a change in status (e.g., change in marital status, new dependent, etc...) in order to make contribution changes to their FSAs. Any change is applied prospectively only (meaning the change does not apply retroactively, so employees cannot change their mind and take an FSA refund). While many employers may wish to offer their employees more flexibility during these uncertain times, we recommend contacting your FSA administrator to confirm that it can or will administer this option. To lessen administrative burden, plan sponsors may also want to consider limiting these mid-year changes to one or more specific ‘window’ periods.
Plan Sponsors Have Extra Time to Amend
Plan sponsors choosing to adopt any of the plan design changes permitted by the CAA must amend their plan by the last day of the first calendar year beginning after the end of the plan year in which the amendment was effective. For calendar-year plan sponsors adopting changes for the 2020 plan year, this means that amendments are due by December 31, 2021 (December 31, 2022 for 2021 changes).