On December 27, 2020 Congress passed the Consolidated Appropriations Act, 2021 (CAA). The CAA provides relief for employees whose dependent care and health care FSA accounts were impacted by the pandemic. This relief will allow employers to amend their FSAs to essentially eliminate the so called “use it or lose rule” for FSA balances not used by the end of 2020 and 2021. This relief is accomplished by giving participants up to an additional year to use the unspent amounts in their FSA accounts. Please see a more detailed description of this relief here.
In addition, the CAA also permits employers to amend their dependent care and health care FSAs to permit contribution election changes (e.g., to start, stop, increase or decrease FSA elections) throughout 2021 for any reason. Please see a more detailed description of this relief here.
Provided below are some key considerations employers should take into account when implementing this relief.
Uniform Coverage Rule
Health care FSAs are subject to the uniform coverage rule that allows participants to be reimbursed for FSA covered expenses up to the amount of the employee’s total annual FSA coverage level (even before those amounts have been contributed to the FSA by the employee).
Absent further guidance, the uniform coverage rule may allow an employee to make a mid-year election in 2021 (as part of the CAA relief) to contribute less to the FSA than the level of reimbursement the employee has received from the FSA for the year, creating an incentive for employees to reduce their elections. The IRS granted uniform coverage rule relief this past summer with respect to 2020 mid-year election changes, so it is possible that the IRS may grant employers some flexibility to prevent this result this time around as well.
FSA and HSA Disqualification
General purpose health care FSAs constitute ineligible coverage for HSA qualification purposes. Accordingly, employees who move from a non HSA eligible plan in 2020 to an HSA eligible plan in 2021 may be disqualified from making HSA contributions if their 2020 FSA contributions are rolled into a general purpose FSA for 2021. Employers should confirm that adopting the CAA FSA relief does not adversely impact their employees’ ability to contribute to an HSA. For example, employers may credit carryover amounts from the 2020 general purpose FSA to a limited purpose FSA that is compatible with HSA coverage for 2021.
Employers should consider the uniform coverage rule and HSA qualification issues when implementing the FSA relief. Employers should consult with their FSA administrator to determine administration limitations and compliance concerns. The FSA changes authorized by the CAA are voluntary and the CAA does not generally limit an employer’s ability to implement the FSA relief. Accordingly, some employers may decide to limit the number of times an employee may make changes to their FSA elections. Some employers may elect the FSA carryover relief, but not permit mid-year FSA elections.
Once the appropriate design has been selected, employers should work with their FSA administrator and legal counsel to communicate the relief and document the changes through plan amendment. Employers have until the end of 2021 and in some cases longer to formally amend their plans to reflect the FSA relief.