In Notice 2021-15, the IRS provides many answers to questions regarding the temporary special rules introduced as part of the Consolidated Appropriations Act, 2021 (CAA) for health flexible spending accounts (health FSAs) and dependent care assistance programs (DCAPs), as well as additional relief under cafeteria plans related to the COVID-19 pandemic. We discussed the temporary special rules provided under the CAA in a prior article. This article highlights the 20 key takeaways from Notice 2021-15 for employers with cafeteria plans.
To briefly summarize, the following categories of relief may be provided by employers with cafeteria plans as a result of the CAA or Notice 2021-15 (denoted by *):
- Expanded carryovers for health FSAs and DCAPs from 2020 to 2021 and from 2021 to 2022;
- Extended grace periods (up to 12 months) for health FSAs and DCAPs for 2020 and 2021;
- Mid-year election changes in 2021 without a status change for health FSAs and DCAPs;
- Mid-year election changes in 2021 without a status change for employer-sponsored health coverage*;
- Permitted reimbursements for expenses incurred in 2021 prior to initial enrollment in a health FSA or DCAP*;
- Post-participation reimbursements from health FSAs; and
- Carry forward for aged-out dependents in DCAPs.
TOP 20 TAKEAWAYS
Carryovers and Grace Periods
- There are no mandatory restrictions on the amounts that may be carried over for the expanded carryovers or that may remain available under the extended grace periods for health FSAs and DCAPs. Any restrictions are voluntary, and all amounts, regardless of the source, remaining at the end of the prior plan year may be carried over to the subsequent plan year under the expanded carryovers or remain available in the subsequent plan year under the extended grace periods.
Example: If a plan provided for health FSA carryovers as of 2019 or earlier, up to $8,750 could potentially remain available in a health FSA account for the reimbursement of expenses incurred on December 31, 2022, coming from $500 carried over from 2019, $2,750 carried over from both 2020 and 2021, and $2,750 (subject to a change in the limit for 2022) contributed in 2022. Similarly, a DCAP account could remain credited with up to $15,000 on December 31, 2022, coming from $5,000 carried over from both 2020 and 2021 and $5,000 contributed in 2022.
- The expanded carryovers or extended grace periods may be limited. An employer implementing the expanded carryovers may limit the carryovers to less than the entire unused amount or may limit the carryovers to apply only up to a specified date during the plan year. A plan implementing the extended grace period may limit the extended grace period to less than 12 months.
- Employees may be required to make a minimum election to access carryovers from the preceding plan year. For example, an employer could require a minimum election of $100.
- Employees enrolling mid-year may be permitted to access carryovers from the preceding plan year. For example, an employee who makes a new election under the health FSA on March 1, 2021, for $100, may be permitted to access the $1,000 that remained in his account on December 31, 2020.
- All amounts remaining in a health FSA or DCAP at the end of the 2022 plan year will be subject to any ordinary grace period or carryover as provided in the plan. For a health FSA, subject to the typical carryover (currently $550) or grace period, the remaining amounts will be forfeited in 2023 following the run-out period. For a DCAP, subject to the adoption of a grace period for 2022, all amounts remaining on December 31, 2022, will be forfeited in 2023 following the run-out period. Currently, carryovers are not permitted for a DCAP after 2022.
- As to employees, the relief provided by the expanded carryovers and extended grace periods is (almost) identical. Both options, if fully implemented, permit employees to avoid any forfeitures and retain full access to the funds remaining in their accounts at the end of 2020 and 2021. However, there is a difference with respect to the special relief for post-participation reimbursements from a health FSA. In short, the individuals could benefit from a subsequent grace period but not a subsequent carryover following their cessation of participation. Also, with respect to a health FSA for the 2022 plan year, a grace period may be more favorable because the entire amount remaining at the end of the 2022 plan year (as much $8,750) will remain available to reimburse expenses incurred through March 15, 2023. In contrast, under the standard carryover, only $550 (subject to further adjustment) may be carried over to the 2023 plan year from the 2022 plan year.
- Employers are still prohibited from having both a carryover and a grace period for a health FSA or DCAP in a single plan year. Employers may, however, use different options for the health FSA and DCAP and may change options from one year to the next. Generally, employers already providing one of these options will want to stick with providing relief under the same option.
Eligibility to Contribute to an HSA
- Continued coverage under a health FSA due to the expanded carryovers or extended grace periods will generally make an employee ineligible to contribute to an HSA. However, an employee will not be ineligible to contribute to an HSA if the health FSA is converted to an HSA-compatible health FSA.
- Employers have options to avoid rendering an employee ineligible to contribute to an HSA due to the expanded carryovers or extended grace periods. Employers may amend their plans to provide for an automatic conversion of the employee’s health FSA account to an HSA-compatible health FSA or to permit employees to opt out of the carryover or grace period on an employee-by-employee basis. Also, employers may prohibit further reimbursements from a health FSA if an employee revokes his or her election, including due to the relief that permits mid-year election changes during 2021 without a status change. In such a case, the health FSA would cease to prevent HSA eligibility following the election revocation.
Mid-Year Election Changes
- Mid-year election changes for employer-sponsored health coverage in 2021 may be permitted without a status change. This special relief is provided by the IRS in Notice 2021-15 and mirrors the same relief provided with respect to 2020 in Notice 2020-29, which we covered in a prior article. As before, to allow such mid-year election changes without a change in status, the employer must receive an attestation in writing from the employee stating that he or she is enrolled, or immediately will enroll, in other comprehensive health coverage not sponsored by the employer. A sample of an acceptable written attestation for this purpose is included in Notice 2021-15.
- Mid-year election changes in 2021 without a status change may be limited. The IRS provides the following examples of limitations that employers may apply for this purpose:
- Limiting changes only up to a certain date;
- Limiting the number of changes that can made (e.g., only one election change in 2021 without a status change);
- For a health FSA or DCAP, preventing the election from being decreased below amounts already reimbursed or only permitting decreases in elections; and
- For employer-sponsored health coverage, prohibiting election changes that increase or expand coverage (e.g., single to family coverage).
- The treatment of amounts remaining after an employee revokes an election depends on the terms of the plan. An employer may provide that remaining amounts are available for the reimbursement of expenses incurred for the rest of the plan year. Alternatively, the employer may provide that the remaining amounts are only available for the reimbursement of expenses incurred prior to the revocation. For a health FSA, the decision can affect whether the employee remains ineligible to contribute to an HSA.
- An employee who enrolls in health FSA or DCAP mid-year 2021 may be reimbursed for expenses incurred in 2021 before the enrollment. This special relief provided in Notice 2021-15 permits employees who enroll in a health FSA or DCAP during 2021 to be reimbursed for expenses incurred in 2021 prior to their first contribution being made. This is a departure from the usual rule that only expenses incurred after the initial contributions are made may be reimbursed.
Post-Participation Health FSA Reimbursements
- If post-participation reimbursements from a health FSA are permitted, former participants who remain covered will generally be ineligible to contribute to an HSA. Except in the case of an HSA-compatible health FSA, the continued coverage is coverage by a health plan that is not a HDHP, which precludes the covered individual from contributing to an HSA.
Example: An individual terminated employment and ceased to be a participant in a health FSA on March 1, 2021. At such time, the individual had a balance of $3,000 in his health FSA account. If the plan provides for the post-participation reimbursements and the extended grace periods, the individual will generally be ineligible to contribute to an HSA (even if he elects HDHP coverage from his new employer) through December 31, 2021, and, if he does not spend down the entire balance by such date, then also through December 31, 2022.
- Post-participation reimbursements from a health FSA may be limited. An employer may, for example, limit the amounts available for reimbursement of claims incurred after participation ceases to unused employee contributions the individual had made from the beginning of the plan year in which the individual ceased to participate up to the date the individual ceased to participate.
- Continued coverage under a health FSA due to post-participation reimbursements will not affect an individual’s ability to elect COBRA. Specifically, the individual will still be considered to have experienced a loss of coverage and must be allowed to elect COBRA, regardless of whether post-participation reimbursements are permitted.
- Amounts available to an individual due to the expanded carryovers or extended grace periods when he or she ceases coverage under a health FSA may not be considered when determining the COBRA premium. Rather, the COBRA premium continues to be based on monthly contribution required for the coverage the individual elected for the plan year. Therefore, amounts contributed in prior plan years that remain available due to expanded carryovers or extended grace periods will remain available to the individual with an effective premium of $0.
- Changes permitted by the CAA are still subject to nondiscrimination rules. The nondiscrimination rules under Section 125 and 129 of the Internal Revenue Code apply to any limitations employers place on the relief permitted under the CAA. However, amounts contributed in a prior plan year that remain available due to the expanded carryovers or extended grace periods are not considered for applying the nondiscrimination rules.
- Employers may retroactively permit reimbursements for over-the-counter (OTC) medications and menstrual care products. As we discussed in a prior article, Section 3702 of the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) permitted, effective as of March 27, 2020, the reimbursement of expenses incurred on or after January 1, 2020, for menstrual care products and OTC medications without a prescription from health FSAs and other health reimbursement accounts. The apparent retroactive addition of expenses that could be reimbursed conflicted with other law. In Notice 2021-15, the IRS states that, notwithstanding other law to the contrary, plans may be amended to allow for the reimbursement of such expenses incurred on or after January 1, 2020, in accordance with Section 3702 of the CARES Act, even if incurred prior to the adoption of the amendment.
- Employers who wish to implement th'/e relief provided in the CAA must adopt an amendment by the last day of the calendar year after the end of the plan year in which the amendment is effective. The amendment may be applied retroactively to its effective date, so long as the plan is operated in accordance with the amendment as of the effective date.
Example: An employer with a health FSA that provides for a $550 carryover (from 2020 to 2021) amends the calendar year plan to provide for expanded carryovers from 2020 to 2021. The amendment, which would have to be effective no later than December 31, 2020, must be adopted by December 31, 2021.