Mar 16, 2021
Section 214 of the Consolidated Appropriations Act, 2021 ("CAA") included optional and temporary relief for health flexible spending accounts ("health FSAs") and dependent care assistance programs ("DCAPs") offered in a Section 125 cafeteria plan ("cafeteria plan"). On February 18, 2021, the Internal Revenue Service ("IRS") issued Notice 2021-15 providing guidance addressing these optional plan changes.
Briefly, highlights from the guidance include:
Additional details on the above are below.
Traditional Rules
A health FSA may permit a carryover of unused amounts remaining in the health FSA as of the end of the plan year (up to $550). A carryover is not permitted in a DCAP.
A health FSA and/or DCAP may permit a participant to apply unused amounts at the end of a plan year to pay expenses incurred for qualified benefits during a period of up to two (2) months and fifteen (15) days immediately following the end of the plan year. This is known as the "grace period."
While inclusion of a carryover or grace period is not required, a health FSA may not have both a carryover and a grace period.
Sec. 214 Carryover and Extended Grace Period Relief
The Sec. 214 carryover relief allows an employer to amend the cafeteria plan to provide a carryover of all (or part of) the unused amounts remaining in a health FSA (including an HSA-compatible health FSA) or a DCAP as of the end of a plan year ending in 2020 and/or 2021 to the immediately subsequent plan year.
Under the extended grace period relief, an employer may amend the cafeteria plan to permit employees to apply unused amounts remaining in a health FSA or a DCAP as of the end of a plan year ending in 2020 and/or 2021 to reimburse expenses incurred for the same qualified benefit (medical care or dependent care) up to 12 months after the end of the plan year.
With respect to both the Sec. 214 carryover and the extended grace period, the following rules apply:
Coordination with HDHPs and HSAs
Generally, a carryover or grace period in a "traditional" or "general-purpose" health FSA is an extension of coverage by a health plan that is not a qualified high deductible health plan ("HDHP") for purposes of determining whether an individual qualifies to make contributions to an HSA, except in the case of an HSA-compatible health FSA, such as a limited-purpose health FSA.
Notice 2021-15 provides welcome relief that allows an employer to amend the cafeteria plan in one of several ways to allow employees to maintain HSA eligibility as follows:
To the extent changes result in an employee being ineligible for an HSA mid-year on a prospective basis, the employee would not be considered HSA ineligible for the earlier part of the plan year.
Health FSA and DCAPs
Employers have the option to amend their cafeteria plan to permit employees to make prospective mid-year election changes for health FSAs and DCAPs for plan years ending in 2021 without a specific change in status event.
If adopted, an employee may make the following changes on a prospective basis with respect to health FSA and/or DCAP election for plan years ending in 2021:
A prospective election change may include an initial election to enroll in the health FSA and/or DCAP for the year. For example, an employee who initially declined to enroll in the health FSA, may make a prospective election to enroll in the health FSA to use a newly available Sec. 214 carryover or extended grace period.
The following applies with respect to these mid-year election changes:
If an employee’s election under a health FSA or DCAP is revoked, then the employer may adopt one of the following rules on a uniform basis:
Group Health Plan Coverage
While not included in the CAA, the IRS is again granting relief permitting employers to amend their cafeteria plan to allow employees to make prospective election changes for group health plan coverage (medical, dental or vision coverage) to:
Employers may also determine a timeframe and the extent to which prospective election changes are permitted and applied (provided such changes comply with the Section 125 nondiscrimination rules) and may limit election changes to circumstances where the employee’s coverage will be increased or improved to avoid adverse selection.
The additional relief relating to employer-sponsored health coverage applies to employers who sponsor fully insured health coverage as well as those who sponsor self-funded health coverage.
It is important to note that nothing in the IRS guidance requires carriers or self-funded health plans (including stop loss insurance) to permit mid-year enrollment and/or coverage changes. Prior to implementing any mid-year election changes to the group health plan coverage, it is important to understand whether the carrier (including stop loss insurers) will allow for such changes mid-year.
An employer may amend the health FSA to permit employees who cease participation in the health FSA during calendar year 2020 or 2021 to "spend down" their unused health FSA contributions through the end of the plan year in which participation ceased, plus any grace period thereafter (including an extended grace period). However, the Sec. 214 carryover relief (if adopted) will not apply after the end of the plan year in which participation ceased.
Notice 2021-15 clarifies:
Under this rule, if a dependent child reaches age 13 during the last plan year with respect to which the end of the regular enrollment period for the plan year was on or before January 31, 2020 (the "first plan year"), the employee can continue to receive reimbursements for such child’s dependent care expenses for:
This relief appears rather limited. For a calendar year plan, it only applies with respect to the January 1, 2020 – December 31, 2020 plan year (the last plan year where the enrollment period was before January 31, 2020), and, with respect to the 2021 plan year, to any unused amounts from 2020.
This special age limit relief for certain dependents is separate from the Sec. 214 carryover relief and extended grace period relief. An employer that adopts the special age limit relief is not required to adopt the carryover or grace period extensions in order to adopt the special age limit relief.
The special age limit relief does not permit a DCAP to reimburse expenses for a child who is age 14 or older.
In addition, Notice 2021-15 affirms that employers are permitted under a DCAP to limit reimbursements to expenses incurred for the care of a dependent child who is under a specified age that is less than age 13.
Generally, amounts contributed to a DCAP are required to be reported in Box 10 of Form W-2. Under existing guidance, employers may report in Box 10 the yearly salary reduction amount elected by the employee for the DCAP (plus any employer matching contributions) and are not required to adjust the amount reported in Box 10 to take into account amounts that remain available in a grace period.
Notice 2021-15 extends this rule for Sec. 214 carryover and the extended grace period and will treat amounts carried forward or extended as an amount that remains available in the grace period.
The Treasury Department and the IRS anticipate that for the 2021 and 2022 Forms W-2 and 2441, instructions will provide for similar rules that DCAP amounts carried forward from prior years under this relief will be treated as amounts remaining available during a grace period for reporting purposes and no change to the reporting requirements will be necessary. Clarification as to how the individual may be taxed when the total benefits used in a calendar year exceed IRS thresholds would be welcome.
If any of the changes described in the CAA and Notice 2021-15 are implemented, the cafeteria plan must be amended no later than the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective.
In addition:
In general, retroactive amendments are not permitted in a cafeteria plan, health FSA, or health reimbursement arrangement ("HRA"). Notwithstanding this general prohibition, Notice 2021-15 allows for a retroactive amendment in a health FSA and/or HRA to provide for reimbursements of expenses incurred on or after January 1, 2020 for menstrual care products and OTC drugs without a prescription. This relief includes amendments made prior to the issuance of this Notice.
Employers should:
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