Much like many individuals who experienced shipping delays waiting for packages that didn’t arrive in time for Christmas, employers and employees have been waiting to see if there would be additional relief for flexible spending account (FSA) participants. The wait is over and the Consolidated Appropriations Act, 2021, was signed by President Trump on December 27th. While there is a lot to uncover in the 5,000 plus piece of legislation, this post focuses on temporary FSA relief that employers may adopt.
Section 125 rules generally require that FSA elections made during the plan year are irrevocable, unless an employee experiences a qualifying mid-year change event (e.g., a change in status that results in a corresponding change in eligibility). Further, elections are generally use-it or lose-it. Account balances not used by the end of the plan year, unless subject to carryover or 2 ½ month grace period, are forfeited by the participant and retained by the plan and applied to the costs of administering the plan.
The new relief under the Consolidated Appropriations Act, 2021, allows employers to amend their plans to:
- Allow employees to make a prospective mid-year election change without requiring a change in status event during the 2021 plan year;
- Let employees carry over unspent account balances up to the full contribution amount from 2020 into the 2021 plan year (or from 2021 into 2022);
- Provide up to a 12-month grace period for unspent account balances at the end of 2020 or 2021;
- Extend reimbursement from health FSAs through the end of the plan year in which a participant ceased participation in the plan during the 2020 or 2021 calendar year; and
- Increase the maximum age under dependent care FSAs from 12 to 13 for the 2021 plan year.
Similar to previous relief, employers may adopt some of the changes, all of the changes or none of the changes under their plans. Employers may adopt changes now and amend their plans by the end of the subsequent calendar year as long as they operate the plan consistently. It will be important for employers to understand what flexibility their claims administrator can allow – not all claim systems will be able to accommodate the relief.
It is also important for employers to remember that cash outs of unused contributions and retroactive election changes are still prohibited under Section 125 rules and that extended coverage under a health FSA grace period may impact eligibility to contribute to a health savings account (HSA). Employees that participate in a health FSA with a rollover provision, a grace period, or are offered an extended coverage period are ineligible to make HSA contributions for the duration of the coverage period (unless the health FSA is HSA compatible or amended to be HSA compatible).
In response to this additional FSA relief employers should:
- Determine which portions of the relief they intend to adopt (if any);
- Work with their HORAN representative to determine which changes their FSA claims administrator can accommodate or will require additional time to make system changes; and
- Communicate any changes clearly to plan participants.
Please contact your HORAN representative with any questions or for additional information.
The information contained in this document is informational only and is not intended as, nor should it be construed as, legal or accounting advice. Neither HORAN nor its consultants provide legal, tax nor accounting advice of any kind. We make no legal representation, nor do we take legal responsibility of any kind regarding regulatory compliance. Please consult your counsel for a definitive interpretation of current statute and regulation, and their impact on you and your organization.