Compliance News | March 1, 2021

IRS Guidance on Temporary Cafeteria Plan Flexibility

Under new IRS guidance in Notice 2021-15, for plan years ending in 2020 and 2021, employers may amend their cafeteria plans to allow employees to make new elections if they initially declined group health plan coverage, or change or revoke existing cafeteria plan elections under certain circumstances.

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This guidance also clarifies certain aspects of the relief provided in recent legislation affecting health and dependent care flexible spending arrangements (FSAs).

This flexibility is a response to the COVID-19 pandemic’s continuing effect on the availability of some medical and dependent care.


In 2020, the Treasury Department and the IRS issued guidance that gave employers significant cafeteria plan flexibility through December 2020. (We summarized that guidance in our May 14, 2020 compliance insight.)

The Consolidated Appropriations Act, 2021 (the Act), signed into law at the end of 2020, provides similar flexibility for health and dependent care flexible spending arrangements (FSAs) in 2021 and 2022 and includes additional types of relief. (See our January 5, 2021 compliance insight.)

The new guidance clarifies aspects of the Act and permits additional flexibility, including with respect to elections relating to health plan coverage in general.

Extended Carryover and Grace Periods

Under the Act, for plan years ending in both 2020 and 2021, plans that include a health or dependent care FSA may allow participants to carry over any unused benefits or contributions remaining in an FSA from 2020 to 2021, or from 2021 to 2022.

In addition, the Act permits plans to offer a 12-month grace period for the plan year ending in either 2020 or 2021 (extended from the usual 2½ months). (A grace period provides extra time after the end of a plan year to incur reimbursable medical expenses.)

The notice clarifies that this flexibility applies to plans that currently have a grace period or provide for a carryover, as well as plans that currently provide neither. In addition, an employer may limit the amount of the carryover and the time period for which it is permitted.

Access to health FSA funds for terminated employees

The Act permits plans to allow 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 includes any grace period and any extended grace period described above.

The notice clarifies that employers may adopt a period that ends before the end of the plan year. Employers are also permitted to limit the unused amounts in the health FSA to the amount of salary reduction contributions the employee made from the beginning of the plan year up to the date the employee ceased to be a participant.

Mid-year election changes permitted

For plan years ending in 2021, the Act permits employers to allow employees to change their health or dependent care FSA election amounts prospectively without regard to any change in status. The guidance builds on this to provide additional relief, similar to that provided previously for plan years ending in 2020.

With respect to health or dependent care FSAs, an employer may permit employees to revoke an election, make one or more elections or increase or decrease an existing election. This includes making a new election to take advantage of newly available extended carryovers or grace periods.

With respect to employer-sponsored health coverage generally, for plan years ending in 2021, employers may permit employees to do any of the following:

  • Make a new salary-reduction contribution election on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage.
  • Revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis.
  • Revoke an existing election 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.


Action items

Employers should decide what relief, if any, they would like to provide to their employees. Plan amendments are required, with the deadline for making them depending on the type of relief and the plan year of the cafeteria plan.

In addition, employers that decide to permit these changes will need to inform employees of any plan changes, determine what information their plan administrators require, amend plan documents and ensure that the plan is operated consistently with those changes.

Plan sponsors of high-deductible health plans paired with health savings accounts (HSAs) will want to assure any permitted changes are consistent with these accounts and inform employees of the implications of the changes, so that the new rules do not deprive employees of the ability to make or receive HSA contributions.

Segal can assist employers in preparing plan amendments and communicating the changes to employees.

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This page is for informational purposes only and does not constitute legal, tax or investment advice. You are encouraged to discuss the issues raised here with your legal, tax and other advisors before determining how the issues apply to your specific situations.

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