Previously, TRI-AD provided information about COVID-19 relief provided by the IRS in Notice 2020-29 for off-calendar year plans and calendar year plans that contain a grace period. See our prior blog.
TRI-AD’s clients are asking questions about the extension of time for employees to incur flexible spending account (FSA) expenses through December 31, 2020 (“extended period”) and the impact this extension has on dependent care flexible spending accounts (DCFSA), health flexible spending account (HFSA), carryovers, and HSA contributions and eligibility. We are providing this information to give some clarity to our clients and readers and welcome any additional questions that arise surrounding these topics.Subscribe
What is the extended period of time and does it apply to both HFSA & DCFSA?
IRS Notice 2020-29 provides increased flexibility with respect to certain cafeteria plans to apply unused amounts in a HFSA or DCFSA to pay or reimburse medical care expenses or dependent care expenses incurred through December 31, 2020. This provision will not apply to all FSA plans, but to plans that do not run on a calendar year basis or plans that have a grace period ending in 2020. This relief applies to general purpose HFSAs and limited purpose HFSAs compatible with health savings accounts (HSA).
If we have an existing carryover provision for the health flexible spending account (HFSA), how will the extended period through December 31, 2020 impact the carryover?
- Plans with HFSA carryover provisions – plans that have HFSA carryovers that are impacted by IRS Notice 2020-29 are off-calendar year plans. If the employer wishes to implement the extended period, the entire unspent 2019-2020 HFSA balance will be available to spend and the carryover calculation for the 2020-2021 plan year will be based on the participant’s HFSA account balance as of 12/31/2020.
- Plans that amended from grace period in 2019 to carryover in 2020 for the HFSA – this is a rare situation, but if an employer implements the extended period, any 2019 balance remaining in the HFSA participant’s account as of December 31, 2020 will be forfeited.
What happens if we implement the extended period and we offer a high-deductible health plan (HDHP) and Health Savings Accounts (HSA)? Will employees be able to contribute to an HSA if they previously participated in a general purpose HFSA?
Implementing the extended period negatively impacts the HSA ability for those individuals switching from a non-HDHP/GPHFSA to a HDHP/LPHFSA/HSA. IRS Notice 2020-29 specifically mentions that the rules surrounding the ability to contribute to an HSA do not change. You can find this information in Section III.B. of the Notice after the examples. Implementing the extended period does impact certain participants if they enrolled in a HDHP/LPHFSA/HSA for plan year beginning in 2020 but had a GPHFSA account balance as of the end of the 2019-2020 run-out period. It is not clear what happens if an employer implements the extended period and participants who had a GPHFSA balance as of the end of the original run-out period have since made HSA contributions, which will create a problem. HFSA participants cannot make contributions to an HSA if they participate in a GPHFSA. Can an employee who had a GPHFSA at the end of the run-out period and went to a LPHFSA be able to incur LPHFSA expenses only and spend down their 2019-2020 GPHFSA in order to avoid an HSA problem? This seems reasonable but is unclear at this time of publication. TRI-AD suggests that clients discuss this issue with their benefits consultants and attorneys. Possibly the easiest solution is for an employer who maintains a HDHP/LPHFSA/HSA option to not implement the extended period since there are issues that have not been addressed specifically by the IRS regarding HSAs. TRI-AD will need instructions from clients on how to handle the HSA issue if they implement the change.
If we implement the extended period, what happens if a participant had an HFSA carryover as of the end of our original run-out period? Will they have access to those carryovers?
If implemented by the employer, participants will have access to their full 2019-2020 unspent amounts until the end of 12/31/2020. The carryover funds should be invisible to the participant since TRI-AD will track the unspent 2019-2020 amount and reimburse based on the first-in, first-out method. As of 12/31/2020, TRI-AD will calculate the carryover amount for the remainder of the 2020-2021 plan year.
Are there considerations from a system or claims processing perspective?
If clients wish to implement the change, TRI-AD will manage the process by extending the period of time for FSA participants to incur FSA expenses in 2020 to spend down their remaining 2019-2020 FSA balances. FSA participants can use their debit cards or submit manual claims in order to spend down their unspent 2019-2020 FSA accounts.
How late into the plan year are plans typically closed and how far out would allowing the extended period extend that?
Plans are closed as of the end of the run-out period (claims deadline) for the plan year. The most common run-out period is 90 days after the end of the plan year. IRS Notice 2020-29 is not clear on the claims deadline after 12/31/2020. The Notice indicates that claims may be “paid or reimbursed” through December 31, 2020. This seems to indicate that the claims submission deadline is also December 31, 2020. TRI-AD will continue to assess this issue and hopefully the IRS will provide additional guidance on this matter.
Does TRI-AD have other thoughts on the challenges, restrictions, or advantages in offering the extended period?
Employers recognize that HFSA/DCFSA participants have challenges in spending down their accounts due to COVID-19 but, as usual, the IRS does not answer all the necessary questions surrounding these changes. The biggest challenge with the extension is where the employee moved from a non-HDHP to an HDHP during open enrollment, had a GPHFSA account balance as of the end of the 2019-2020 run-out period, and has participated in an HSA in the new plan year.
TRI-AD is ready to assist our clients with allowable changes and will collaborate to craft a solution suitable for your organization’s requirements.
The information in this blog is effective as of this publication date herein, however, it may be subject to change due to additional regulatory or legislative action during the COVID-19 period.
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.