Alerts

FAQs: The Consolidated Appropriations Act (Temporarily) Offers Greater Flexibility for Flexible Spending Arrangements

Alerts / December 29, 2020

Q: Does the Consolidated Appropriations Act, 2021 (CAA) make any changes to health flexible spending arrangements (Health FSAs)?

A: Yes, if an employer sponsoring a Health FSA chooses to implement changes permitted by the CAA.

There are several temporary Health FSA-related options under the CAA for employers to consider:

  1. Carryovers: For plan years ending in 2020, an employer may permit Health FSA participants to carry over any unused benefits or contributions remaining in their Health FSAs to the plan year ending in 2021. Similarly, unused amounts from a plan year ending in 2021 may be carried over into the plan year ending in 2022. The ability to carry over any unused benefits or contributions is more generous than the previous $550 carryover limitation. A Health FSA may not have both a carryover feature and a grace period feature.
  2. Extension of Grace Periods: For plan years ending in 2020 or 2021, an employer may extend the grace period up to 12 months after the end of the plan year during which a participant may incur expenses against unused benefits or contributions remaining in the Health FSA. This extended grace period is 9.5 months longer than the typically permitted 2.5-month grace period. Remember, a Health FSA may not have both a carryover feature and a grace period feature.
  3. Post-Termination Reimbursements: For an employee who ceases participating in a Health FSA in 2020 or 2021, an employer may permit the participant to continue to receive reimbursements from unused benefits or contributions through the end of the plan year in which such participation ceased. In addition, if a grace period is offered, the participant may continue to receive reimbursements from unused benefits or contributions through the duration of the grace period, even if such grace period has been extended as permitted by the CAA.
  4. Election Changes: An employer may permit employees to make prospective elections to modify the amount of their contributions to a Health FSA for plan years ending in 2021. No change in status is required to substantiate the election change, but no election change may exceed the applicable annual dollar limitation for Health FSAs (i.e., $2,750 for 2021).
Q: Does the CAA make any changes to dependent care flexible spending arrangements (Dependent Care FSAs)?

A: Yes, if an employer sponsoring a Dependent Care FSA chooses to implement changes permitted by the CAA.

There are several temporary Dependent Care FSA-related options under the CAA for employers to consider:

  1. Carryovers: For plan years ending in 2020, an employer may permit Dependent Care FSA participants to carry over any unused benefits or contributions remaining in their Health FSAs to the plan year ending in 2021. Similarly, unused amounts from a plan year ending in 2021 may be carried over into the plan year ending in 2022. This carryover feature typically is not permitted for Dependent Care FSA plans.
  2. Extension of Grace Periods: For plan years ending in 2020 or 2021, an employer may extend a grace period up to 12 months after the end of the plan year during which a participant may incur expenses against unused benefits or contributions remaining in the Dependent Care FSA. This extended grace period is 9.5 months longer than the typically permitted 2.5-month grace period.
  3. Election Changes: An employer may permit employees to make prospective elections to modify the amount of their contributions to a Dependent Care FSA for plan years ending in 2021. No change in status is required to substantiate the election change, but no election change may exceed the applicable annual dollar limitations (i.e., $2,500 or $5,000, as appropriate).
  4. Carry-Forward Opportunity for Aged-Out Dependents: An employer may permit reimbursement for Dependent Care FSA expenses incurred for children up to age 14 (instead of up to age 13). Such reimbursements are available to employees participating in the Dependent Care FSA for the last plan year for which the enrollment period ended by January 31, 2020 (for most Dependent Care FSA plans, this will be the calendar year 2020 plan year). In addition, a participant who has one or more dependents who turn 13 during the subsequent plan year (again, for most Dependent Care FSA plans, this will be the calendar year 2021 plan year) and who has unused benefits or contributions from the prior plan year may be reimbursed for expenses for their age 13 dependent(s) during the subsequent plan year up to the amount of the unused benefits and contributions from the prior plan year.
Q: Do employer plan sponsors have to permit these changes to the Health and Dependent Care FSA Plans?

A: No, these changes are completely voluntary; however, employers who have large amounts of employee forfeitures due to the pandemic will want to carefully consider these options and what makes sense for their plans.

Q: If an employer plan sponsor wants to make some of these changes available, must it amend its Health or Dependent Care FSA Plan(s)?

A: Yes.

An employer plan sponsor that wishes to make any of these temporary options available to its employee participants must amend its plan(s) to reflect such changes. An amendment may be retroactive; however, the due date for any such amendment depends on the effective date(s) of the change(s). Changes that are effective with respect to FSA changes effective in 2020 must be reflected in a plan amendment that is adopted by December 31, 2021. Changes that are effective with respect to FSA changes effective in 2021 must be reflected in a plan amendment that is adopted by December 31, 2022. In all cases, the FSA must be operated consistent with the terms of such amendment from the effective date of the change to the date the amendment is adopted.

As with what happened following the passage of the CARES Act, it is possible that the Internal Revenue Service will issue guidance related to these changes. If that happens, we will issue additional commentary.

Authorship Credit: Susan Whittaker Hughes and Jennifer A. Mills

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