New Law Provides Additional Flexibility for Health FSAs and Dependent Care FSAs

The Internal Revenue Service (IRS) recently released Notice 2021-15, providing clarity regarding FSA relief available under the Consolidated Appropriations Act Benefits Law.

There are new, temporary options employers can now implement to their Health and Dependent Care Flexible Spending Accounts (Health FSAs and Dependent Care FSAs). Notice 2021-15 supplements legislation that was included in the Consolidated Appropriations Act 2021, which optionally allow for the following:

1. Unlimited Carryover Relief

• Employers may temporarily allow for unlimited carryover of unused funds under their Health FSA and/or Dependent Care FSA

2. Extended Grace Period Relief

• Employers may temporarily extend grace periods for up to 12 months under their Health FSA and/or Dependent Care FSA.

3. Mid-Year FSA Election Change Relief

• Employers may temporarily allow election changes without a change of status qualifying event under their Health FSA and/or Dependent Care FSA.

4. Health FSA Spend Down Relief

• Employers may temporarily allow post-termination participation under their Health FSA for employees who had unused contributions at the time of termination.

5. Dependent Care FSA Age Limit Relief

• Employers may temporarily allow certain dependents who “aged-out” of eligibility under the Dependent Care FSA to continue participation for an additional year (i.e. increases the maximum age for qualified dependents from 12 to 13).

These optional provisions were signed into law by Congress since many employees were unable to use their Health FSA or Dependent Care FSA funds because of the COVID-19 pandemic. IRS Notice 2021-15 helps clarify some information and adds some additional options. Here are a few key takeaways from the Notice:

1. Employers may permit employees to make an election change under an employer-sponsored health plan without a qualifying event. This applies only to plan years which will have an end date in 2021. Employees could enroll in a plan if they initially declined coverage, change to a different plan offered by the employer, or drop coverage provided the employee attests in writing that they have (or immediately will have) coverage under another plan. Please note that if an employer wants to implement this option, they should also check with their insurance carrier. The insurance carriers also have the option of accepting midyear enrollments without a qualifying event.
2. The Notice confirms that enrollment in a Health FSA eliminates eligibility for a Health Savings Account (HSA) unless the Health FSA limits reimbursements to dental and/or vision expenses (known as a Limited Purpose FSA). Enrollment in a Health FSA during a grace period or carryover also eliminates HSA eligibility during that period unless the Health FSA is Limited Purpose. The Notice optionally allows employers to let employees convert their Health FSA during the plan year to a Limited Purpose FSA. Similarly, the Notice optionally allows employers to let employers convert any carryover or grace period funds so that they may only be used for Limited Purpose expenses. These changes would allow for HSA eligibility.
3. When the Health FSA is subject to the Consolidated Omnibus Budget Reconciliation Act of 1985 (COBRA), and the employer also allows for post-termination participation to use remaining unused contributions, the employer must give the employee the ability to continue coverage under both options, and the employee would choose which option they prefer. If they elect to continue coverage under COBRA, the employee will be eligible to be reimbursed for up to their original election amount, and the employer can charge a premium for remaining contributions. If they elect to continue coverage under the post-termination option, the employee will be eligible to be reimbursed for their remaining unused contributions, and no additional premium should be charged.
4. For tax reporting purposes, employers must report Dependent Care FSA contributions (whether made by the employer or employee) on Box 10 of Form W-2. The Notice confirms that only salary reduction contributions made by an employee or contributions made by the employer for the calendar year are to be reported. Any funds that are available because of a grace period or carryover are not reported in the subsequent year that they are available.
5. The Notice confirms unused Health FSA and Dependent Care funds cannot be cashed out nor can you roll unused Health FSA funds into a Dependent Care FSA, or vice versa.

Thinking of implementing these new options?

Employers who implement changes to their Cafeteria Plan, Health FSA, or Dependent Care FSA, will generally need to have a plan amendment prepared to formally adopt the changes.