During 2020, a number of newly enacted laws created flexibility for various employee benefit plans. Please see Foster Swift’s publications on this topic here
. The Consolidated Appropriations Act of 2021 (the “Act”), which was signed into law on December 27, 2020, provides additional flexibility for Health Flexible Spending Accounts (“Health FSAs”) and Dependent Care Assistance Plans (“DCAPs”), specifically.
In general, Health FSAs are used by employees to pay for copays, deductibles, and other permitted health care costs on a pre-tax basis. DCAPs are similarly used by employees to pay for costs associated with the care of individuals under the age of 13 on a pre-tax basis. In order to experience these tax benefits, a Health FSA and DCAP must be offered as part of a Code Section 125 Cafeteria Plan and comply with certain rules. Some of those rules relate to the types of benefits that may be covered, the timing of when benefit elections may be made and changed, the disposition of unspent funds remaining at the end of the plan year and the identity of the individuals who can receive benefits under the plan.
The Act relaxes a number of these rules. We address the changes below.
- Health FSA Carryover Limit Increased. Generally, the IRS limits the amount of unused Health FSA benefits that a participant may roll over from one plan year to the next. In 2020, that limit was $550. For a limited time, the Act completely disregards the limit and permits any unspent Health FSA amount to be carried over from 2020 to 2021 (and from 2021 to 2022).
- Grace Period Extension. Instead of a carry-over amount (as discussed above) a Health FSA may have an extended period of coverage after the end of each plan year (referred to as a “Grace Period”) in which to use unspent Health FSA amounts. DCAPs may also permit a Grace Period. The Grace Period may generally extend for up to 5 months after the end of a plan year. The Act extends this Grace Period from 2.5 months to 12 months after the end of the plan year. Accordingly, a participant with unspent Health FSA or DCAP amounts as of December 31, 2020 may incur additional expenses through December 31, 2021 and be reimbursed from his or her 2020 account balances.
- Mid-Year Election Changes. Typically, a participant must make an irrevocable election for Health FSA and DCAP benefits during the open enrollment period prior to the first day of the plan year to which the election relates. Changes are permitted thereafter only upon the occurrence of a qualifying event such as marriage, divorce, or the birth of a child. The Act permits mid-year election changes to be made in 2021 for Health FSA or DCAP benefits (on a prospective basis) for any reason.
- Post-Termination Reimbursement from Health FSAs an DCAPs. Participants who terminate employment during 2020 or 2021 may be permitted to be reimbursed for Health FSA expenses incurred following their termination dates and prior to the first day of the next Plan year, plus any applicable Grace Period. (This rule was previously available only for DCAPs.) Such reimbursement may be limited to the unspent Health FSA amounts remaining at termination.
- Aged-Out Dependents in DCAPs. DCAPs are permitted for employment related expenses that are used to care for a “qualifying individual.” A qualifying individual is an individual who has not attained age 13. The Act permits plans to allow DCAP reimbursement for individuals who attain age 14 in 2020 or 2021 if the participant has unspent DCAP amounts as of December 31, 2020. For example, this would be applicable, if permitted by the plan, for a participant (1) whose child is 13 years old during 2020, (2) who does not use all of his or her other DCAP benefit from 2020, and (3) the child attains age 13 during 2021.
Note that these provisions are optional, and an employer is not required to adopt any of them. If it chooses to do so, an employer must adopt a plan amendment outlining the provisions that it selects. The amendment may be retroactive, but must be adopted no later than the last day of the first calendar year that follows the year in which the amendment is effective. For example, if the amendment becomes effective in 2021, the amendment must be adopted by December 31, 2022.