Late Sunday, President Trump signed the Consolidated Appropriations Act, 2021 (“Act”) which includes many provisions intended to provide relief due to the COVID-19 pandemic. Several of these provisions affect health and welfare plans, including temporary, special rules providing increased flexibility for Health and Dependent Care FSAs. The following is our initial review of the Act’s provisions impacting Health FSAs and Dependent Care FSAs. Please note that this is general information and there’s nothing you need to do right now. We are assessing the impact of these changes on our administration and addressing our system capabilities and will share more details soon on how this may affect your plans.
Summary of changes:
Carryovers Permitted for Health FSAs and Dependent Care FSAs
Health FSA and Dependent Care FSA plans can allow participants to carryover any unused amounts from a plan year ending in 2020 to the plan year ending in 2021. Additionally, Health FSAs and Dependent Care FSAs can allow participants to carryover any unused amounts from a plan year ending in 2021 to the plan year ending in 2022. The Act does not change the rules regarding the impact of Health FSA carryovers on HSA eligibility, so employers will want to consider this if an HSA is added in 2021 or 2022. Further, the Act does not change the rule that a plan may have carryover or a grace period (not both). While the concept of Health FSA carryover has been around since 2013, the temporary option to add Dependent Care FSA carryover is new under the Act.
12-Month Extension of FSA Grace Period Permitted
For plan years ending in 2020 or 2021, Health FSA and Dependent Care FSA plans with grace periods may extend the grace period to 12 months after the end of the plan year. This will allow participants to incur eligible expenses for a 12-month period after the end of the plan year (versus the traditional grace period of 2 ½ months). The Act does not change the rules regarding the impact of Health FSA grace periods on HSA eligibility, so employers will want to consider this if an HSA is added in 2021 or 2022. Further, the Act does not change the rule that a plan may have a grace period or carryover (not both).
The extended Dependent Care FSA Grace Period option may be especially helpful for Dependent Care FSA participants who have unused amounts due to childcare facility and camp closures during the COVID-19 pandemic.
Extension of Election Changes for Health FSAs and Dependent Care FSAs Without a Change in Status
Generally, an employee’s election is irrevocable unless the employee experiences an allowable change event. For plan years ending in 2021, plans may allow employees to make a prospective election change to modify the employee’s Health FSA or Dependent Care FSA contributions without a change in status. This provision in the Act is similar to the COVID relief contained in IRS Notice 2020-29 (May 2020), which allowed prospective election changes in 2020 without a change in status.
Post Termination Reimbursements Permitted from Health FSA (Health FSA Spend Down)
Health FSAs may allow an employee who ceases participation in the plan during 2020 or 2021 to receive reimbursements from unused benefits or contributions through the end of the plan year in which the employee’s participation ceases (including any grace period and any extension of the grace period under the Act). Outside of this relief, a participant who ceases participation would normally have to elect COBRA in order to access an unused balance.
Extension of Maximum Age Permitted for Dependent Care FSAs and Special Carry Forward Rule for Dependents Who Aged Out During Pandemic
Generally, expenses incurred after a child turns 13 are ineligible for reimbursement under a Dependent Care FSA. The Act allows a Dependent Care FSA plan to extend the maximum age to 13 for eligible dependents who aged out of eligibility during the last plan year with a regular enrollment period ending on or before January 31, 2020, so that expenses can be incurred until the child turns 14. Plans may allow participants with unused balances at the end of that plan year to apply this age extension rule to claims in the subsequent plan year.
Deadline to amend plan
Plans adopting these permissive changes can be retroactively amended provided that the plan is (1) amended by the first calendar year beginning after the end of the plan year in which the change is effective and (2) is operated in accordance with the terms of the amendment beginning on the effective date of the changes.
What do we need to do now & how is ProBenefits adapting?
There is nothing you need to do right now. We are currently assessing the impact of these changes on support services we provide for your plans, including Health FSA and Dependent Care FSA administration. We are also addressing our system capabilities and will share more details soon on necessary adjustments to adapt to these temporary changes and any next steps for employers.
Thank you for your engagement on these challenging but important topics. We will be in touch soon with more information.