The Consolidated Appropriations Act (CAA), signed into law December 27, 2020, allows several temporary changes to Flexible Spending Accounts (FSAs) in response to the COVID-19 pandemic.
These changes are optional–employers may choose which (if any) they wish to allow. Employees must be notified of any adopted changes, and a plan amendment is required to support those changes. The amendment must be completed no later than the end of the year after the year in which the change was made. For example, if the change was made in 2021, the plan amendment must be made by December 31, 2022. The plan may operate in conformance with the changes back to the date stated in the amendment.
Here are the temporary FSA changes an employer may adopt:
- Grace Periods: A grace period option allows employees to claim against the previous year’s unused health FSA funds for 2-1/2 months after the end of the plan year. The CAA allows plans with a grace period to extend it up to 12 months for plan years 2020 and 2021. This would allow employees to claim unused health FSA funds for a much longer period than previously allowed. Also, CAA now allows employees who cease participation in a health FSA to continue to claim against their unused funds through the end of the plan year and any grace period.
- Carryover: The carryover option allows employees to access up to $550 of the previous year’s health FSA funds through the end of the following plan year. In May 2020, the health FSA carryover amount was increased from $500 to $550 for 2020; it will be indexed in future years. CAA rules now allow all unused amounts for 2020 or 2021 to be carried over for 12 months. This carryover option may also be adopted for dependent care FSA accounts, which have not previously allowed any carryover of contributions.
- Health FSA Changes: Participants may make changes to their health FSA election without experiencing a qualifying event in 2021. For example, they could revoke their election, make a new election, or increase/decrease their contribution for any reason. Changes must be prospective only. Employers may want to specify that a reduction of contributions cannot bring the employee’s total contribution (plus any carryover amount) below the amount of claims payments they have received before the election change.
- Dependent Care Special Provisions: Dependent care FSAs typically allow funds to be used to care for children up to age 13. For 2020, the age was temporarily raised to up to age 14. In 2021, a participant may receive reimbursement for a child up to age 14 if they had unused funds remaining in their 2020 dependent care FSA account. Also, similar to health FSAs, participants may modify their dependent care FSA contributions. Those changes also must be prospective only.
Considerations for Employers:
While employees will likely appreciate any flexibility provided in these accounts, there are things an employer should consider when deciding which temporary changes to adopt.
- Extending the health FSA carryover or grace periods may cause problems with HSA enrollment since participants who have money available in a health FSA cannot be covered by an HSA for the same months.
- Employees will have a longer period to use their FSA funds under the claim extensions. Consequently, employers should expect to see less in forfeit funds. This is a consideration if the organization uses forfeit funds to offset employer losses from claims paid to terminated employees prior to their completing their annual health FSA contributions for the year.
- Employees must be notified as soon as the employer decides to adopt any of these temporary changes. Employees may need to make adjustments to their 2021 FSA elections based on the changes adopted.
- Consider a change to COBRA procedures if the organization allows those who cease participating in a health FSA to continue accessing unused FSA funds. COBRA may not need to be offered to terminating participants since they will still have access to the FSA money after leaving the organization.
These changes allow flexibility for 2020 and 2021 FSA funds. Any flexibility after the extensions run out would need to come from the passage of additional regulations. Call Employers Council with questions; we can help.