Earlier this year, Bret Busacker explained the FSA relief enacted as part of the Consolidated Appropriations Act, 2021 (CAA) in a blog post titled “Bridge Over Troubled Water: 2021 Flexible Spending Account Relief in the Consolidated Appropriations Act, 2021.” The FSA relief in the CAA essentially permits employers to eliminate the “use it or lose it rule” for 2020 and 2021 and to permit mid-year FSA changes to both health FSAs and dependent care FSAs. The IRS recently issued additional guidance with respect to these FSA relief provisions in IRS Notice 2021-15 (the “Notice”).
The Notice primarily provides clarification around the:
- Carryover of unused amounts from the 2020 and 2021 plan years;
- Ability to extend the permissible period for incurring claims for plan years ending in 2020 and 2021;
- Ability to permit post-termination reimbursements from health FSAs;
- Ability to use a special claims period and carryover rule for dependent care FSAs when a dependent “ages out” during the COVID-19 national emergency; and
- Ability to make certain mid-year election changes for health FSAs and dependent care FSAs for plan years ending in 2021.
Some of the highlights of the Notice concern additional guidance on mid-year election changes to health FSAs, including the following:
Limitations on Group Health Coverage Mid-Year Election Changes
Under the Notice, a cafeteria plan may be amended to allow employees to (1) make a new election for group health coverage on a prospective basis, if the employee initially declined to elect group health coverage; (2) revoke an existing election for group health coverage and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis (including changing enrollment from self-only coverage to family coverage); and (3) revoke an existing election for group health coverage on a prospective basis, provided that the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer. The Notice provides a sample written attestation for employees revoking their coverage in its entirety.
Relief from the Uniform Coverage Rule
Generally, under the Uniform Coverage Rule, an employee is able to use his or her full health FSA election amount immediately. This can lead to situations where a participant uses his or her entire FSA election amount before the total amount has been contributed to the FSA. If such an employee then loses or reduces FSA coverage such that no further amounts are contributed to the FSA, then the employer has no recourse with respect to the FSA amounts used by the employee in excess of the amounts withheld. The Notice provides relief from the Uniform Coverage Rule for 2021 for mid-year election changes by providing employers the ability to limit any changes that decrease FSA election amounts to the amounts necessary to cover any amounts already reimbursed under the FSA prior to the election change.
Keep in mind that the FSA relief under the CAA and the Notice is optional. Cafeteria plan sponsors that have adopted or intend to adopt any of the available relief must amend their plans no later than the end of the calendar year following the year in which the relief is first effective. Additionally, any planned changes should be discussed with the FSA administrator to ensure that the administrator is able to properly administer them.