As part of the COVID-19 relief package passed by Congress earlier this week, which has not yet been signed into law by President Trump, the federal government expands on earlier relief issued by the Internal Revenue Service (IRS) for health and dependent care flexible spending account benefits (FSAs). Under these temporary rules, plan sponsors may give their employees additional time to use their FSA account balances and to make changes to their FSA elections. These changes are optional and require plan amendments.
Read below for more details about this relief, including the deadlines to make plan amendments.
No Limit on FSA Carryovers and New Dependent Care Carryover
As described in our earlier blog related to the IRS relief, FSAs generally are subject to a “use it or lose it” rule, pursuant to which employees must use their account balances for eligible expenses incurred during the plan year, subject to limited exceptions that allow a carryover of unused amounts to the next plan year (only $550 for 2020 and $560 for 2021) and a 2 ½ month grace period for both health and dependent care FSAs. Significantly, the new legislation eliminates the health FSA carryover limit, allowing employees to carry over any unused amounts from the 2020 or 2021 plan year to the next plan year, and also permits dependent care FSA carryovers for those years, which is not permitted under current law. As a reminder, the IRS guidance issued earlier this year did not relax the carryover rules, but did increase slightly the health FSA carryover limit.
Extension of FSA Grace Periods
Under current law, health and dependent care FSAs may allow participants to be reimbursed for claims incurred during a 2 ½ month grace period following the end of the plan year, unless the health FSA includes a carryover provision. The new legislation extends the permissible grace period to 12 months following the end of the plan year (or presumably a period that is shorter than 12 months), for plan years that end in 2020 or 2021. Under the earlier IRS guidance, plans with grace periods expiring before December 31, 2020 and non-calendar year plans ending before December 31, 2020 were allowed to extend their grace periods until the end of 2020. As an example, a plan with a July 1, 2019 to June 30, 2020 plan year was allowed to extend its grace period to permit employees to incur expenses for an additional six months (through December 31, 2020). With the new relief, the plan can extend the grace period further, through June 30, 2021.
Extension of Dependent Care Age Limit
The new legislation includes a provision to address situations where a dependent child attained age 13 (the age limit for dependent care reimbursements) during the pandemic, before the employee was able to use all of their dependent care account funds for the year. Under this provision, a dependent care FSA that has an enrollment period that ended by January 31, 2020 (for the most recent plan year) may allow reimbursement of expenses through the end of the plan year, or through the next plan year when the child attains age 14 (solely with respect to any unused balance from the prior year).
Mid-Year FSA Election Changes
In general, employees may only make FSA plan changes during a plan year if the employee experiences a change in status event under the IRS rules. Similar to the earlier IRS guidance, which allowed mid-year election changes in 2020 regardless of whether the employee experienced a change in status event, the new legislation allows plan sponsors to permit prospective mid-year election changes to FSA elections in plan years ending in 2021 without regard to a change in status. Unlike the IRS relief for 2020 (which also applied to other health plan elections), this relief appears to be limited to FSAs.
Post-Termination Health FSA Reimbursements
Employees generally may only receive reimbursement from a health FSA for expenses that are incurred while employed, subject to COBRA rights. The new legislation includes a provision that permits plan sponsors to allow reimbursements through the end of the 2020 or 2021 plan year in which participation ends, including any grace period or extended grace period. The impact of this change is not entirely clear, since employers generally offer COBRA rights under health FSAs in any event (unless the excepted benefit rules permit otherwise). It is possible that the regulators are merely clarifying that a plan sponsor may now allow a former employee to continue to incur claims and receive reimbursements without requiring the employee to make a COBRA election and premium payment.
Deadline for Adoption of Plan Amendments
If a plan sponsor chooses to adopt any of the above changes, which may apply retroactively, the applicable plan documents must be amended by the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective. Accordingly, for calendar year plans, amendments effective in 2020 must be adopted by December 31, 2021, and amendments effective in 2021 must be adopted by December 31, 2022. Plan sponsors also should communicate the changes to affected employees in time to be useful.