A section of the Consolidated Appropriations Act, 2021 (CAA, 2021) grants temporary special relief for Health Flexible Spending Accounts (FSAs) and Dependent Care Assistant Programs (DCAPs). At American Health Resources, we offer FSAs and DCAs. The IRS issued Notice 2021-15, which spells out the details of the Act’s temporary exceptions, how they apply and examples are provided as well. Employers who offer these benefits should be made aware of the flexible options that are now made available to them and their employees. The types of relief offered are completely optional. Should an employer choose to participate, plans can be tailored to the employer’s preference so long as it is within the guidelines. Below are the latest key points that are outlined by N-2021-15:
Carryover Relief– Part or all FSA & DCA unused funds in 2020 may carryover to the 2021 plan year. The same exception may apply again at the end of 2021and into the plan year of 2022 as well. There is no set restriction on rollover amount.
Grace Period Relief– Up to 12 month extended grace periods is permitted for FSAs & DCAs in 2020 and 2021. There is no set restriction on grace period.
Carryover Relief & Grace Period Relief Rules:
- Carryover relief and Grace period relief can be defined by the employer if they choose to take advantage of the flexibility of these rules.
- Employers can require a minimum election amount for employee to have access to funds in the next plan year.
- Both carryover and grace period relief apply to plans with and without grace period and/or carryover allowance.
- Employers may vary the application of relief subject to the code of nondiscrimination rules.
- Employers may adopt both relief rules one year and not the same rules next plan year.
- The pre- CAA, 2021 standard rules will apply for FSA & DCA plans that end in or after 2022.
- Carryover and grace period relief do not apply to employer’s FSA or DCA.
Election Relief – Certain mid-year election changes for the FSA & DCA for plans ending in 2021 are permitted without status change. This relief was available in 2020 and the details of the IRS ruling for this is found in Notice 2020-29. As in the previous year, to initiate the mid-year election, the employee must submit an attestation, in writing, to his/her employer that states that the employee will immediately enroll, or is enrolled in another health care plan that is not sponsored by employer. Notice 2015-15 provides an example of a properly written attestation that demonstrates this purpose. Employers who choose to permit mid-year election changes can set limits to the extent of its use with respect to non-discriminatory rules. The IRS allows employers to set the following limitations:
- The number of times an employee can change their election.
- Set a deadline for permissible election relief to be exercised.
- Not allowing the election to decrease below the amounts that have already been reimbursed.
- Permit decreases in elections only.
- Prevent coverage expansion/increase of an employer sponsored healthcare plan.
Other highlights of mid-year election relief are listed below.
- The treatment of funds that remain after an employee revokes an election depends on the terms of the plan. Unused funds can be spent as reimbursement of medical expenses for the remainder of the plan year, or they can be used toward reimbursement of incurred expenses prior to revocation. The unused funds can also be forfeited completely.
- After FSA participation is terminated, HSA coverage may commence if employee meets all the HSA eligibility requirements.
- If an employee enrolls in a DCA or FSA in the middle of the year of 2021, he or she may be reimbursed for expenses that were incurred after January 1, 2021 prior to enrolling.
DCA Age Relief
DCA’s coverage age increased from 13 to 14 years for reimbursing expenses incurred the last plan year with a regular enrollment plan period ending on or prior to January 31,2020. Employers may allow employees with unused account funds to apply toward claims in the following plan year.
If an FSA is extended because of grace relief or carryovers, it will make the individual ineligible for HSA contributions, unless the FSA is HSA-compatible. An employer can exercise a few options to avoid this conflict.
- If FSA is not HSA-compatible, their standard FSA plan can be amended, then converted to an HSA-compatible FSA to allow for HSA contributions.
- Employees can choose to opt out of both carryover and grace period relief.
- An employee may revoke his or her election and employer can prohibit further reimbursements into FSA account.
- Additional unused funds made available because of extended carryover or grace period relief may not be considered, and will remain independent, when calculating COBRA premiums.
- If employers wish to implement the discussed temporary reliefs provided by the CAA, amendment adoption must be made by or before the last day of the calendar year after end of plan year in which the amendment is in effect. The amendment can be made retroactively to an effective date, if the plan is exercised according to the amendment’s effective date. Employers must give proper notice to employees of these changes as well.
- Employers may choose to amend HRAs and FSAs to allow for expansion of reimbursement of costs incurred on over-the-counter medications and menstrual care products which were made on or after January 1,2020. This is in accordance with sect. 3702 of the CARES Act.