President Trump signed the Consolidated Appropriations Act of 2021 (CAA) on December 27, 2020. The 5,593-page bill included annual funding for the Federal government and many other provisions but also contains several COVID-19 relief provisions. Included are welcome relief provisions for health flexible spending accounts (HFSA) and dependent care flexible spending accounts (DCFSA).
The bill permits (does not require) employers to amend their cafeteria plans to allow the participants to carry over unspent amounts or extend a grace period into 2021 and 2022. Also included in the bill are provisions that increase the age of a dependent from 12 to 13 for certain DCFSA participants, allows terminated employees to continue to spend down accounts, and allows an employee to make an election to modify prospectively their HFSA/DCFSA annual elections. The Department of Treasury will need to provide detailed guidance, however employers will no doubt want to implement these provisions quickly before guidance is published. Below are the details based on the CAA. These rules may change once guidance is published.
Allowing Access to Unspent FSA Balances for Plan Years Ending in 2020 and 2021
Employers have two ways in which to allow participants to spend down unspent FSA balances.
- Carryover Provisions Allowed for Unspent 2020 or 2021 Remaining FSA Balances
Under typical non-COVID rules, cafeteria plans may only allow employees to carry over HFSA amounts up to $550 into a new plan year and the carryover rules do not apply to DCFSAs. However, with the CAA rules, employers may allow any unspent balances in both HFSAs and DCFSAs at the end of 2020 to carry over to 2021 without the $550 maximum limitation.
Specifically, for plan years ending in 2020, balances remaining in HFSAs or DCFSAs may be carried over to the end of the plan year ending in 2021, with no limitation. For plan years ending in 2021, the same rule is true so any remaining money in the HFSA and DCFSA at the end of the 2021 plan year may be carried over to the end of the plan year ending in 2022.
Example – a DCFSA participant has a balance of $3,000 in her DCFSA at the end of the plan year December 31, 2020. If the employer implements the CAA carryover provision, this participant may carry over $3,000 into the 2021 plan year. If at the end of 2021 the same participant has a balance of $2,000 in their DCFSA and the employer implements the CAA carryover provision for the 2021 plan year, the participant may carry over their DCFSA balance of $2,000 into the 2022 plan year.
- Grace Period Extension for 2021 and 2022
Under normal non-COVID rules, cafeteria plans may contain a grace period which allows participants to “incur” HFSA and/or DCFSA expenses up to 75 days after the end of a plan year. Under the CAA, employers may now extend the grace period for a plan year ending in 2020 or 2021 to 12 months after the end of such plan year.
Example – a cafeteria plan with a plan year ending December 31, 2020, typically provides a grace period for HFSA and DCFSA to incur FSA expenses through March 15, 2021. If the employer implements the CAA grace period provision for the 2020 plan year, the participants may incur HFSA and DCFSA expenses through December 31, 2021 to spend down their 2020 balance. Likewise, if the employer implements the CAA grace period provision for the 2021 plan year, the participants may incur HFSA and DCFSA expenses through December 31, 2022 to spend down their 2021 DCFSA balance.
Important Note – under the CAA extended grace period provision, an individual who had unused general purpose HFSA amounts remaining at the end of a grace period ending in 2020 and/or 2021 will not be eligible to contribute to an HSA during the extended period (except in the case of an HSA-compatible health FSA, including a health FSA that is changed to be HSA-compatible, or a limited purpose HFSA). Employers need to be aware of this complicated issue if they sponsor a high deductible health plan and an HSA.
What should employers elect, carryover or extended grace period?
If employers wish to take advantage of the CAA new rules to allow FSA participants to spend down unused FSA balances, the result of either option, carryover or grace period extension, is generally the same; FSA participants are allowed to spend down their FSA balances until the end of the following 2021 and 2022 plan years. For TRI-AD’s clients, we will administer the carryover and extended grace period based on the client’s current plan design and whether the plan already allows for a carryover, grace period, or neither provision. We will also revise communications to participants accordingly.
Please note that pursuant to IRS Notice 2020-29, if employers extended an applicable grace period for their 2019 calendar plan year to December 31, 2020, are they allowed to carry forward these amounts into the 2021 plan year? At this time and based on the CAA written law, we do not believe the 2019 remaining FSA balances should be allowed to be carried forward. Employers may want to discuss this matter with their benefit attorneys. Also, please note that HFSA participants who still have balances in their 2019 HFSA accounts still have until the end of the Outbreak Period to submit claims (not incur expenses). More information about the Outbreak Period will be provided.
Post-Termination Reimbursements for HFSA
CAA also provides that an employer may allow an employee who ceases to participate in the HFSA during calendar year 2020 or 2021 to continue to spend down his or her account from unused benefits or contributions through the end of the plan year in which their participation ceased, including any standard grace period or extended grace period mentioned above. The carryover would not apply to a terminated participant. Based on the language in the law, we believe that the employer may limit the amount of reimbursement to the amount contributed up through the participation termination date. This means if a HFSA participant terminates employment, they have two options:
- enroll in COBRA and continue to contribute monthly to spend down their full annual election amount; or
- not enroll in COBRA and spend down their contributions paid through the time they terminated employment.
Example – a cafeteria plan HFSA currently provides that a terminated participant may continue to submit claims for eligible HFSA expenses incurred prior to termination of employment through the end of the run-out period for the plan year in which they terminate. A HFSA participant may elect COBRA to continue to incur HFSA expenses up to the end of the plan year in which they terminate. An employee terminated employment on June 30, 2021. Normally, the terminated participant may submit claims for HFSA expenses incurred between January 1, 2021 – June 30, 2021 by the end of the run-out period for the 2021 plan year. If the employer implements the post-termination reimbursement provision of CAA, the terminated participant may continue to incur and be reimbursed for eligible HFSA expenses dated on or before December 31, 2021, without enrolling in COBRA. Or the individual can enroll in COBRA and continue to make contributions to spend their entire HFSA annual election amount on or before December 31, 2021. In addition, if the plan contains a grace period and the employer extends the grace period to all participants as mentioned above, the terminated participant may continue to incur HFSA expenses through the end of the grace period, as well.
Employers should note that the health FSA spend-down provision could block terminated participants’ HSA eligibility for the remainder of the plan year if the individual participated in a general purpose HFSA before they terminated participation. If the individual participated in a limited purpose HFSA, the spend-down provision should not have any impact on their HSA eligibility.
Special Carry Forward Rule for DCFSA Where Dependent Aged Out During Pandemic
Under current law, DCFSA arrangements may only reimburse for dependents up to the age of 13, i.e., through the age of 12. Eligible dependents that aged out during the pandemic present problems for DCFSA participants if they were not able to send their children to daycare. The CAA’s COVID relief provisions raise the maximum age of a child for whom qualifying childcare expenses may be reimbursed under a DCFSA to age 13 during the plan year for which the end of the open enrollment period was on or before January 31, 2020. This change will apply where a participant has at least one tax dependent who turns 13 during that plan year. Also, if the participant has an unused balance in his or her DCFSA for that plan year, expenses can be reimbursed in the subsequent plan year, but only as to amounts paid for dependent care assistance that do not exceed the unused balance. This provision typically will apply to a plan with the plan year ending December 31, 2020, however, this plan year just ended. If an employer adopts this CAA provision, these particular employees may submit daycare expenses for their dependents age 13 or less in 2021 and be reimbursed up to the unspent amount from 2020.
Change in HFSA/DCFSA Annual Election Amounts
Similar to prior COVID-19 relief provided, for plan years ending in 2021, employers may allow employees to modify (increase, decrease, enroll in, or revoke) their annual HFSA or DCFSA elections prospectively for any reason and without regard to any existing change in status rules. It appears the law only applies to the HFSA and DCFSA arrangements, so employees may not change their health plans unless they incur a qualifying event to allow a change.
If employers implement the CAA carryover or extended grace period provisions, they will probably want to allow employees to make annual election changes since any amounts employees elected during the most recent open enrollment may need to be changed.
Employers adopting any of these voluntary changes must be amended by the end of the first calendar year beginning after the end of the plan year in which a change took effect and must be operated in accordance with the amendment’s terms retroactive to it’s effective date. For example, for a calendar plan year ending in 2020, any amendment reflecting the changes implemented by the employer must be signed on or before December 31, 2021.
Implementing any or all of the CAA FSA provisions will allow FSA participants to spend down rather than forfeit their unspent FSA accounts. We believe most employers will want to allow for some or all of the CAA provisions, however allowing these changes may complicate the administration and impact participants’ ability to participate in an HSA. Service providers will need to modify their administrative systems and communications to accommodate such changes. Employers should speak with their consultants and service providers to discuss the administrative issues for these changes. Also, employers should seek counsel with their benefit attorneys as there are unanswered questions based on the reading of the law. TRI-AD is working with our clients to implement the new law as quickly as possible.
TRI-AD and our Associates’ suggestions or recommendations shall not constitute legal advice. No content on our website can be construed as tax or legal advice and TRI-AD may not be considered your legal counsel or tax advisor. Clients are encouraged to consult with their tax advisor and/or attorney to determine their legal rights, responsibilities, and liabilities. This includes the interpretation of any statute or regulation, federal, state or local; and/or its application to the clients’ business activities.