Consolidated Appropriations Act of 2021 Includes Flexible Spending Account Relief
The Consolidated Appropriations Act of 2021 (the “Act”) was signed into law on December 27, 2020. Buried within its 5,593 pages is some welcome flexibility relating to 2020 and 2021 health care and dependent care Flexible Spending Accounts (FSAs). Specifically:
Expanded Carry-Over or Grace Period
- Under the Act, health care FSAs and dependent care FSAs may permit participants to carry-over any unused funds from the 2020 plan year to the plan year ending in 2021. Similarly, health care and dependent care FSAs may permit participants to carry-over unused funds from the 2021 plan year to the plan year ending in 2022.
- Alternatively, health care and dependent care FSAs that include a grace period, as opposed to a carry-over provision, may extend the 2020 and/or 2021 grace periods from up to two months and 15 days after the end of the plan year to 12 months after the end of the plan year.
Post-Termination Reimbursements for Health Care FSAs
- Health care FSAs may permit employees who terminate employment or otherwise cease participating in the plan during plan years ending in 2020 or 2021, to continue incurring expenses and receiving reimbursements from unused amounts through the end of the year in which the employee's participation ends. This expanded reimbursement period specifically includes any grace period, if applicable, including any extension pursuant to the Act.
Mid-Year Election Change Flexibility
- Ordinarily, cafeteria plan elections are irrevocable during a plan year, unless a participant experiences an IRS-approved status change event such as marriage, birth, divorce, or change in employment status. The Act temporarily permits cafeteria plans to allow participants to make prospective mid-year election changes with respect to health care and dependent care FSAs (i.e., to elect an account, increase or decrease contributions, or drop an account) for plan years ending in 2021 for any reason--no qualified status change event is needed.
Extended Coverage for Dependents who Age-Out
- The Act includes a carry-over rule for dependents who aged-out of a dependent care FSA during calendar year 2020. Stated another way, generally, dependent care expenses are only eligible for reimbursement if the expense relates to care of dependent children age 12 and under, but the Act increases the maximum age limit for reimbursement of dependent care expenses from 12 to 13 for calendar year 2020. The Act also allows the increased age limit for amounts carried over from the end of the 2020 plan year to the 2021 plan year for the dependent who aged-out.
A Few Tips and Reminders
- All of the above changes are optional, and formal plan amendments are not required until the last day of the first plan year following the plan year in which any change is effective.
- Plan sponsors are free to pick and choose what changes they wish to adopt and to place restrictions or parameters upon the changes they do adopt (e.g., permit carry-over of unused funds for the 2020 plan year but not the 2021 plan year; permit participants to make one mid-year election change to their FSA elections but not multiple changes.)
- If changes in plan operation pursuant to the Act are adopted, participants will need to be advised of them. Any changes should be communicated through a summary of material modifications or updated summary plan description.
- Health care FSAs cannot have both a carry-over provision and a grace period. The same is true for dependent care FSAs during plan years ending in 2020 and 2021 when carry-overs are temporarily permitted under the Act.
- If a plan sponsor maintains a high deductible health plan option under its major medical plan, it should carefully consider how any extended carry-over or grace period will affect the participants’ ability to contribute to a health savings account (HSA). Remember that individuals will be ineligible to contribute to an HSA if they participate in other group health plan coverage, including a general-purpose health care FSA. In the absence of an HSA-compatible limited purpose FSA, the carry-over provision is generally considered the more flexible option because the participant may waive it.
- When communicating changes and updating plan documents, do not forget that the flexibility afforded by the Act is in addition to the changes and flexibility introduced last year by the CARES Act, IRS Notices 2020-29 and 2020-30, and joint guidance issued by the Department of Labor and Treasury. Please see our related posts here, here, and here.
Should you have any questions regarding the changes included in the Act or need assistance updating your plan documents, please contact a member of Verrill’s Employee Benefits and Executive Compensation Group.