In our previous alert announcing the Coronavirus Response and Relief Supplemental Appropriations Act, 2021 (CRRSAA), we discussed the new flexible spending account (FSA) options employers have permission to implement if they would like. As an employer offering FSAs, you have the following options available:
- If offering a health FSA with a carryover provision, you could:
- Allow employees to carry over any unused funds from the plan year ending in 2020 to the plan year ending in 2021 (the usual limit was $500, or $550 for a carryover to a plan year starting in 2021)
- Allow employees to carry over any unused funds from the plan year ending in 2021 to the plan year ending in 2022
- If offering a health and/or dependent care FSA with a grace period provision, you could:
- Extend your 2.5 month grace period for plan years ending in 2020 or 2021 to last 12 months instead
- If you were not previously offering a carryover or grace period, you could retroactively adopt a carryover for the plan year ending in 2020 (even for dependent care FSAs which usually cannot have a carryover)
- The CRRSAA only allows plans to “extend” a grace period, so you could not retroactively adopt a new grace period if you did not offer one previously, but retroactively adopting the carryover benefit accomplishes the same goal
- You could provide employees who ceased participation in a health FSA during calendar year 2020 or 2021 the opportunity to receive reimbursements from unused funds through the end of the plan year in which such participation ceased (including a subsequent grace period or extended grace period) without having to pay a COBRA premium
- You could allow (or might have to allow) dependent care expenses past age 13 for children who turned 13 during the pandemic
- For the last plan year whose regular annual enrollment was on or before January 31, 2020, an employee that was enrolled and had a child turn 13 during that plan year could be allowed to utilize dependent care FSA funds for the rest of that plan year after the dependent had turned 13
- If funds still remain at the end of that plan year, then those specific remaining funds could also be allowed to be used for that dependent’s expenses the next plan year until their 14th birthday
- Note this portion of the law actually amends the tax code, so if your dependent care FSA plan document simply points to the definition of a qualifying dependent in the tax code, then this provision might be something you have to honor, but if your plan language specifies age 13 then this provision might be optional to you (pending clarifying guidance from the IRS)
- You could allow employees to make a prospective modification of election amounts for health and dependent care FSAs (only for plan years ending in 2021)
- This could be helpful for those with more carryover funds or a longer grace period than they expected, and so they’d like to reduce new contributions for this year as a result
Below we’ll walk you step-by-step through determining whether any of these temporary options are worth adopting for your employees. We believe most employers will be interested in adopting this relief provided by Congress so employees are not forfeiting contributions they paid from their paychecks in 2020 but were unable to use due to the pandemic.
- First, evaluate your plan data to see the amount of funds employees are forfeiting from 2020.
- Remember there were options last year for an employer to allow employees to change the amount they contribute to their FSAs without a qualifying event (QE), and to extend grace periods to last through December 31, 2020. The CARES Act also expanded reimbursable health expenses to include over-the-counter medications without a prescription and menstrual products. If you adopted one or more of these changes for your employees, that may have helped provide more ways to mitigate potential forfeitures, but it might not have been enough to spend down all funds by the end of the plan year.
- Also, a change in daycare provider or change in the cost of daycare was already a QE for the dependent care FSA. However, even someone who ceased their contributions as soon as their daycare closed, or someone who was contributing in anticipation of summer day camp, may have some funds contributed early 2020 they were never able to spend down completely.
- The pandemic has been viewed by the federal government as a serious enough financial crisis that they’ve offered a very large number of Americans with two stimulus checks. So if any of your employees are forfeiting funds, it’s probably worth considering whether to extend some of Congress’s newest relief on your FSAs, as Congress feels these changes are meaningful to Americans.
- If none of your employees are forfeiting funds, then the new relief wouldn’t be needed for your employees.
- If you determine that you’ll extend your plan’s grace period or increase your carryover amount, then it also probably makes sense to give employees an opportunity to change their corresponding election for the rest of the new year (no retroactive changes).
- Access to more time or more carryover funds means they might have a better shot at spending down that money and not have to contribute as much for the new year.
- We don’t have official IRS guidance yet, but last summer when they offered an opportunity to make FSA contribution changes, the IRS said employers could limit the election change to a specific time period and could structure it so employees still had to contribute enough to fund claims the employee has already benefited from. We would expect they’ll stipulate employers are allowed these restrictions again.
- If you determine some employees’ dependent care FSA forfeitures are related to being unable to spend funds intended to provide care for a child that turned 13 during 2020, then it may make sense to also provide the opportunity for employees to treat past expenses as reimbursable after they turned 13, and perhaps to even allow remaining funds to be available the following plan year to the child’s 14th birthday.
- As mentioned in our intro above, this might not be optional to you depending on your plan’s language and any clarification the IRS might provide. A plan that points to the tax code to define a qualifying dependent rather than stipulating age 13 as its limit may not have a choice here.
- While there is an option to not charge COBRA for a health FSA of a terminated participant, we imagine most employers will not be interested in that option.
- Reevaluate these options toward the end of your plan year ending in 2021 to see if you should offer an enhanced carryover or grace period for 2022.
- However, you cannot provide the option to change your FSA contribution amount without a QE or the option to allow dependent care expenses past age 13 for 2022.
It’s also important to remember some fundamentals about your existing FSA plans that may dictate how you proceed. For your health FSA:
- If it has a carryover benefit, you could consider whether to increase its cap from $500 or $550 to something more (we would still advise a cap that seems to cover your employees’ needs, since unspent funds could include new contributions and prior year carryover amounts which can potentially push you well above $3,000 in carryover funds this year and as high as $6,000 next year); or
- If it has a grace period, you could consider whether to increase it from 2.5 months to 12 months this year; or
- If it didn’t offer a carryover or grace period, consider that you’re allowed to retroactively adopt a carryover for the plan year ending in 2020 so that unspent funds can now be available for all of 2021 instead of having to be forfeited.
- Remember that FSAs cannot have a carryover benefit and a grace period for the same plan year.
- For example, your 2021 plan year cannot close with both a carryover and grace period. It could only close with one or the other going into 2022.
Likewise, for your dependent care FSA:
- If it has a grace period, you could consider whether to increase it from 2.5 months to 12 months this year; or
- If it didn’t offer a grace period, consider that you’re allowed to retroactively adopt a carryover for the plan year ending in 2020 so that unspent funds can now be available for all of 2021 instead of having to be forfeited.
Adopting changes to your 2020 plan (such as extending a grace period, increasing the carryover limit, implementing a new carryover provision, and/or increasing the dependent care expense past age 13) must be adopted by the end of your 2021 plan year, so there’s plenty of time to draft plan language to reflect temporary changes. But you’ll want to communicate options to your employees right away. It will also be good to remind employees that signed up for HSAs how a grace period or carryover will impact their ability to contribute to the HSA.
IMA will continue to monitor regulator guidance and offer meaningful, practical, timely information.
This material should not be considered as a substitute for legal, tax and/or actuarial advice. Contact the appropriate professional counsel for such matters. These materials are not exhaustive and are subject to possible changes in applicable laws, rules, and regulations and their interpretations.