IRS Announces Greater Flexibility for Health and Dependent Care FSAs

On February 18, 2021, the IRS announced Notice 2021-15. The notice allows health FSAs and dependent care assistance programs to have additional discretion in 2021 and 2022 to adjust their programs to help employees better meet the public health emergency’s unanticipated consequences.

The notice provides flexibility:

  • For the carryover of unused amounts from the 2020 and 2021 plan years into the next year;
  • To extend the permissible period for incurring claims for plan years ending in 2020 and 2021;
  • To adopt a special rule regarding post-termination reimbursements from health FSAs;
  • For a special claims period and carryover rule for dependent care assistance programs when a dependent “ages out” during the COVID-19 public health emergency; and
  • Allows certain mid-year election changes for health FSAs and dependent care assistance programs for plan years ending in 2021.

The IRS announcement stresses that employers are not required to make any or all of the adjustments but are now allowed to. They also remind employers that the same tax rules apply to deductions as in standard years. We encourage employers to contact their insurance provider or brokers for help with adjusting plans and a CPA or the IRS to be sure their taxes are set up correctly.