The Consolidated Appropriations Act ("CAA") made several temporary changes to health flexible spending accounts ("health FSAs") and dependent care assistance programs ("DCAPs") in 2020 and 2021.
Any or all of these changes may be made at a plan sponsor's election:
- All unused 2020 health FSA and/or DCAP funds may be carried over to 2021; unused 2021 health FSA and/or DCAP funds may be carried over to 2022. For context, carryovers are typically capped at $550 and are not permitted in DCAPs.
- A grace period associated with a plan year ending in 2020 or 2021 may be extended up to 12 months after the end of the plan year. Grace periods are typically no longer than two and one-half months. (Remember, a plan may allow carryovers or have a grace period but cannot do both.)
- Participants may make prospective mid-year election changes to their health FSA or DCAP in 2021 without experiencing a change in status.
- Participants who terminate employment in 2020 or 2021 may continue to be reimbursed for eligible expenses through the end of that plan year if they had unused health FSA or DCAP funds at termination.
- DCAPs only: The eligible expenses of a dependent who aged out during the 2020 plan year may be reimbursed for one additional year, until the dependent turns 14 years old. Typically, dependents age out when they turn 13 years old.
Internal Revenue Service guidance (Notice 2021-15) supplemented the CAA changes by noting that the carryover and grace period relief are available to plans regardless of whether they currently have a carryover or grace period. Further, DCAPs, while they typically do not allow carryover of unused funds, may temporarily adopt a carryover, subject to the same rules as a health FSA. The Notice also provided that unused funds carried over from the immediately preceding plan year or available during an extended grace period do not count toward a participant's annual contribution limit in the following year.
With respect to mid-year election changes, the Notice clarifies that employees may prospectively revoke an election, make an election or increase/decrease an existing election for their health FSA and/or DCAP for plan years ending in 2021. An employer may limit the number of mid-year changes an employee may make during this period. Additionally, an employer may limit the extent to which an employee may revoke an election to amounts already contributed.
If you would like to adopt any of these changes, action must be taken no later than the last day of the calendar year after the end of the plan year to which the changes relate. Generally, this means that changes to the 2020 plan year must be adopted no later than December 31, 2021 and changes to the 2021 plan year must be adopted no later than December 31, 2022. Each of these changes requires a plan amendment (and corresponding updates to the plan's summary plan description).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.