Due to the COVID-19 outbreak, employees may be more likely to have unused funds in their health flexible spending accounts (FSAs) or dependent care assistance program (DCAP) accounts.
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.
On May 12, 2020, the Internal Revenue Service (IRS) announced the following employer options to grant employees the ability to take advantage of unused health FSA and DCAP funds:
- An extended period for incurring health FSA or DCAP expenses.
- Relaxed mid-year election change rules for all health FSAs and DCAPs for 2020 to allow participants to revoke their elections, make new elections or change existing elections.
- Allow employees to apply unused amounts remaining in a health FSA or DCAP account, at the end of a plan year ending in 2020 or grace period ending in 2020, to pay or reimburse expenses incurred through December 31, 2020. This relief applies to all health FSAs, including health FSAs that allow carryovers.
- Increase the FSA carryover limit for unused funds remaining at the end of a plan year from $500 to $550 to reflect indexing for inflation. This change is effective for plan years beginning in 2020 and reflects the maximum amount that may be carried over to the immediately following plan year beginning in 2021.
It is up to the employer to permit employees to take advantage of these options. It’s important to note that employers who choose to implement these changes must adopt an amendment for their Section 125 cafeteria plans by December 31, 2021. Employees will also need to be notified of these changes.