Temporary Changes to Health and Dependent Care FSAs

Plan amendments must be adopted by the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective.

Carryover of funds

For plan years ending in both 2020 and 2021, plans that include a health or dependent care FSA will not fail to be treated as a cafeteria plan merely because they allow participants to carry over any unused benefits or contributions remaining in an FSA from 2020 to 2021, or from 2021 to 2022.

Extended grace period

With respect to health or dependent care FSA unused benefits or contributions, plans may extend a grace period for the plan year ending in either 2020 or 2021 to 12 months after the end of the plan year. This means that plans that generally have a grace period for up to 2½ months after the end of the previous plan year for claims to be submitted may extend that grace period to 12 months.

However, the provision does not apply to a health FSA with a $500 (indexed) carryover.

Access to health FSA funds for employees who no longer participate

Plans may permit employees who cease participation in a health FSA during calendar year 2020 or 2021 to continue to receive reimbursements from unused benefits or contributions through the end of the plan year in which in which they ceased participation (dependent care FSAs already permit this access under existing regulations). This provision includes any grace period and any extended grace period described above.

Access to dependent care FSA funds extended for dependents who aged out of eligibility during the pandemic

Dependents who aged out of dependent care FSA eligibility during the pandemic can be covered through age 14 instead of 13 for unused funds. The employee must have been enrolled in a dependent care FSA for the plan year with respect to which the end of the regular enrollment period was on or before January 31, 2020, and may use the balance in the subsequent plan year.

Implications for employers

In May 2020, the Treasury Department and IRS issued guidance that permitted employers to allow various mid-year election changes and give employees an extension until the end of the year to spend unused funds in their health and dependent care FSAs. (We summarized that guidance in our May 14, 2020 compliance insight.) Under that guidance, plan documents had to be amended no later than December 31, 2021 to take advantage of these rules.

The COVID-19 relief package codifies and expands on that guidance, and extends the time for plan amendments. Employers should review their Section 125 plans with their plan administrators to determine whether they wish to provide this additional flexibility for employees and, if so, assure that plan documents are amended on a timely basis.

Employers may also wish to communicate this new flexibility to employees who may be anxious about whether they can use funds in their FSAs.

Employers are reminded that the emergency paid sick leave and emergency paid family and medical leave adopted under the Families First Coronavirus Response Act (FFCRA) expired on December 31, 2020. Private sector employers that employ fewer than 500 employees may voluntarily extend the FFCRA leave provisions and can claim refundable tax credits to offset the cost of providing the leave through March 31, 2021. The wages for which the tax credits are claimed are not deductible and the tax credits apply to wages paid after December 31, 2020 and before April 1, 2021.

An employer will need to determine if extending the opportunity to provide FFCRA paid leave is beneficial to its workforce as compared to the associated costs and will need to consider how an extension may impact its overall leave policy and other state law requirements.