The Internal Revenue Service (IRS) has released a notice intended to clarify the application of temporary special rules for health flexible spending accounts (FSAs) and dependent care assistant program (DCAP) accounts under the Consolidated Appropriations Act, 2021 (CAA).
Health FSAs and DCAPs are accounts individuals can make pre-tax contributions to, that are then used to pay for certain out-of-pocket healthcare costs or day care expenses. Due to the nature of the public health emergency posed by COVID-19 and the unanticipated changes in availability of certain medical and dependent care, employees may be more likely to have unused health FSA or DCAP amounts at the end of 2020 and 2021.
Notice 2021-15 provides additional mid-year election change relief for Section 125 cafeteria plans and illustrates how the health FSA and DCAP relief provisions interact with each other, how certain provisions impact eligibility to contribute to an HSA, and their impact on COBRA continuation coverage.
Section 125 Mid-year Election Changes
In certain circumstances, Section 125 plans may permit employees to make or revoke election changes. Similar to prior guidance for 2020, the Notice clarifies that employers can decide how long to permit mid-year election changes with no change in status during the plan year; and can limit the number of election changes during the plan year that are not associated with a change in status.
Employers that wish to implement the CAA and the Notice relief for a cafeteria plan with a health FSA or a DCAP must adopt a plan amendment to do so. The amendment may be effective retroactively to the beginning of the applicable plan year, so long as certain requirements are satisfied.
The Notice provides relief with respect to plan amendments expanding reimbursable expenses for health FSAs and HRAs to include over-the-counter drugs and menstrual care products. Amendments to these specific plans must normally be made on a prospective basis, however, these amendments may allow these reimbursements beginning on or after January 1, 2020.
An employer can provide a carryover of unused amounts remaining in either a health FSA or DCAP as of the end of a plan year ending in 2020 or 2021 to the immediately subsequent year. The notice clarifies that:
- The carryover is available to plans that currently have a grace period or provide for carryover, as well as plans that currently do not have a grace period or provide for a carryover—despite the general rule that an FSA can adopt either a grace period or provide for a carryover amount but cannot have both (which otherwise continues in effect).
- The carryover relief applies to all FSAs, including HSA-compatible health FSAs, and also applies to all DCAPs.
- An employer may limit the carryover to an amount less than all unused amounts.
- An employer may limit the carryover to apply only up to a specified date during the plan year.
For additional information and examples of these rules, click here. Please note that employers have discretion in adopting some or all of the relief discussed, and can generally determine the extent to which the relief is permitted and applied. Keep in mind, employers are also responsible for the notification of adopted changes.
It is our goal to guide you through ongoing change. Questions? Contact the Creative Benefits, Inc. Team at 866-306-0200 or firstname.lastname@example.org.