Section 214 of the Consolidated Appropriations Act, 2021 (CAA) provides a substantial amount of flexibility for the operation of health and dependent care Flexible Spending Accounts (FSAs). The CAA did, however, leave many open questions regarding how to implement and apply the added flexibility. IRS Notice 2021-15, released February 18, provides welcome clarity regarding several of the lingering questions, as well as some additional relief and guidance.
The CAA permits health and dependent care FSAs to provide the following relief:
- Mid-Year FSA Election Change Relief –Allows employees, on a prospective basis, to make one or more elections, revoke an election, or decrease or increase an existing election regarding a health or dependent care FSA for the plan year ending in 2021, regardless of whether they have a change in status event.
- Unlimited Carryover Relief – Allows employees to carry over any unused health and/or dependent care FSA funds as of the end of a plan year ending in 2020 or 2021 to the immediately following plan year.
- Extended Grace Period Relief –Extends the grace period for a health and/or dependent care FSA for a plan year ending in 2020 or 2021 to up to 12 months after the end of that plan year.
- Health FSA Spend Down Relief – Allows employees who cease participating in a health FSA during calendar year 2020 or 2021 to continue to spend down unused account balances through the end of the plan year in which their participation ceased, including any grace period.
- Dependent Care FSA Age Limit Relief – Increases the maximum age for qualified dependents from 12 to 13, for purposes of determining the dependent care assistance that may be paid or reimbursed during (1) the last plan year with regard to which the regular enrollment period ended on or before January 31, 2020, and (2) in the case of an employee who has an unused balance in their dependent care FSA for such plan year, the immediately following plan year (until the child attains age 14).
More detailed information regarding the CAA relief is available here.
Below are common questions from employers regarding the CAA relief and a summary of the answers provided by IRS Notice 2021-15.
If we adopt the Unlimited Carryover Relief, can our plan allow employees to carry funds over for multiple plan years?
Yes. Notice 2021-15 provides that all funds available on the last day of the 2020 and 2021 plan years may be carried over to the immediately subsequent plan year, regardless of the source of the funds. Accordingly, an employee who carried over $500 from the 2019 plan year, and still has the $500 remaining in their account at the end of the 2020 plan year, may carry over the $500 plus any amounts contributed during the 2020 plan year (and not used to reimburse expenses) to the 2021 plan year.
If we adopt the Unlimited Carryover Relief, can our plan require that an employee enroll with a minimum election amount for the immediately subsequent plan year to access amounts carried over from the prior plan year?
Yes. Notice 2021-15 clarifies that employers who adopt Unlimited Carryover Relief may require employees to enroll in the applicable FSA with a minimum election amount (often $50 or $100) to access funds carried over from the prior plan year.
Can we offer both Unlimited Carryover Relief and Extended Grace Period Relief for the same health or dependent care FSA for the same plan year?
No. Notice 2021-15 states that an employer may not adopt both the Unlimited Carryover Relief and the Extended Grace Period Relief for the same health FSA or dependent care FSA plan for the same plan year. Though both relief options provide the same advantage (the ability to reimburse current year expenses with funds contributed during a prior year), they interact differently with the Health FSA Spend Down Relief. An employer that adopts the Extended Grace Period Relief may also allow an employee who terminates participation in the health FSA to extend the period for incurring reimbursable claims until the end of the plan year following the plan year in which the employee’s participation terminated. Conversely, adopting the Unlimited Carryover Relief (in lieu of the Extended Grace Period Relief) will limit an employee who terminates participation in the health FSA to reimbursement of claims incurred during the year in which the employee’s participation terminates. Accordingly, Notice 2021-15 requires that a plan amendment specify which relief – Unlimited Carryover Relief or Extended Grace Period Relief – is adopted for the applicable plan years. Employers that sponsor multiple health FSA plans or dependent care FSA plans, may elect different relief for different plans. In addition, within the bounds of the nondiscrimination rules, employers may adopt relief for certain health FSA or dependent care FSA participants, but not others.
If we adopt the Mid-Year FSA Election Change Relief, can we limit the ability of employees to make, revoke, decrease, or increase their elections?
Yes. All relief available under the CAA and Notice 2021-15 is optional, and employers may place restrictions or parameters upon the relief they do adopt. For example, employers may limit the number of changes allowed during the 2021 plan year that are not associated with a status change, and employers may limit the period for making election changes not associated with a status change. In addition, to limit the risk of experience loss, employers may limit mid-year election changes to amounts no less than amounts already reimbursed.
Can we allow employees to make retroactive mid-year changes to health or dependent care FSA elections for the plan year ending in 2021?
No. Employers cannot amend a plan to allow retroactive changes to health or dependent care FSA elections. Accordingly, employees cannot be allowed to obtain a cash “refund” of amounts contributed to their health or dependent care FSA by reducing their contribution election below the amount already contributed to their account. Notice 2021-15 states, however, that employers may allow employees to use funds contributed to a health or dependent care FSA following a mid-year election change to reimburse expenses incurred at any time during the first plan year that begins on or after January 1, 2021 through the end of the 2021 plan year.
What new relief is available under Notice 2021-15?
Similar to relief provided under IRS Notice 2020-29 (more information available here), Notice 2021-15 allows employers to amend their Section 125 cafeteria plans to permit employees to make mid-year election changes for employer-sponsored health coverage for the plan year ending in 2021, regardless of whether the employee experiences a change in status. Specifically, an employee may, on a prospective basis, (1) make a new election for employer-sponsored health coverage if the employee initially declined coverage, (2) revoke an existing election for employer-sponsored health coverage and make a new election to enroll in different health coverage sponsored by the same employer, and (3) revoke an existing election for employer-sponsored health coverage, provided the employee attests in writing that the employee has or immediately will enroll in other health coverage not sponsored by the employer.
If we adopt the Health FSA Spend Down Relief, are we required to provide a COBRA election notice to qualified beneficiaries?
Yes. Individuals that are qualified beneficiaries under the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA) because, for example they lost coverage after experiencing a reduction in hours or termination of employment, maintain the right to elect COBRA continuation coverage for their health FSA even if the sponsoring employer has adopted the Health FSA Spend Down Relief. Because the Health FSA Spend Down Relief only provides employees who cease participating in a health FSA the ability to spend down the salary reduction contributions made by the employee as of the date the employee ceased participating in the health FSA, rather than the full amount of the employee’s health FSA election, the reduction in hours or termination of employment constitutes a COBRA qualifying event subject to notice requirements.
When must we amend our Cafeteria Plan to reflect CAA relief?
Amendments to incorporate CAA relief may be retroactive so long as they are adopted no later than the last day of the first calendar year beginning after the end of the plan year in which the relief is effective. This means for changes effective for a 2020 calendar plan year, amendments must be adopted no later than December 31, 2021. Notice 2021-15 clarifies that for the amendment to have retroactive effect, the plan must be operated consistent with the terms of the amendment beginning on the effective date of the amendment and ending on the date it is adopted, and employers must “inform all employees eligible to participate in the [plan] of the changes to the plan.” The Notice does not provide any guidance regarding when or how employees must be “informed” of the changes.
In addition to the above clarifications, Notice 2021-15 also contains helpful guidance on other topics implicated by the CAA and COVID-19 relief generally. An important piece of this guidance is useful comments and examples regarding the effect of adopting increased flexibility for a health FSA on an employee’s eligibility to contribute to a health savings account.
 This is consistent with the existing guidance in IRS Notice 2013-71, which provides that health FSAs can either provide for a carryover amount or adopt a grace period but cannot have both. IRS Notice 2021-15 helpfully clarifies, however, that Unlimited Carryover Relief is available to plans that currently provide for a carryover or have a grace period, as well as plans that currently do not provide for a carryover or have a grace period, notwithstanding IRS Notice 2013-71, which otherwise continues in effect.