On December 27, 2020, the latest COVID relief bill, the Consolidated Appropriations Act, 2021 (CCA), was signed into law. The law includes several provisions that provide relief for health and dependent care flexible spending accounts.
At Keel Point, we welcome these changes as they remove barriers that arose from the difficulties faced by millions of workers in 2020. Many FSA and dependent care FSA owners did not use their funds as expected in 2020.
One of the most popular benefits is for employees to use FSA funds to pay for childcare services. Last year we saw a record number of employees working from home and many childcare services were closed for significant portions of the year as well.
Unlike most health savings account (HSA) funds, FSA dollars are designed to be spent in the year they are deferred. Many employees faced losing their contributions for the year until the CCA was enacted.
Employers may, but are not required to, permit the following:
Employers adopt either a Grace or Carryover option to assist with the “use it or lose it” rule surrounding Flexible Spending Account plans
- Unused Funds Carryover: Employers can allow the carryover of unused FSA and dependent care FSA funds (with no dollar limit) from a plan year ending in 2020 and/or 2021 to a plan year ending in 2021 and/or 2022. Before the bill passed, Carryover was limited to 20% of the maximum election ($550)
- Extended Grace Period: Employers can extend the FSA and dependent care grace period to up to 12 months after the end of the plan year for a plan year ending in 2020 and/or 2021. This option allows FSA holders to file a claim against 2021 claims utilizing 2020 funds.
Keel Point adopts the Carryover option for our own plan instead of the Grace Period and almost universally recommends the same for our business clients. Employees are more accustomed to the “rollover” methodology that translates with Carryover. Grace effectively creates a long – previously up to a 14 ½ month calendar year.
Carryover is far easier to illustrate and can jumpstart employee participation in an FSA, even if it is a small initial amount. Employers reap payroll tax benefits alongside employee ‘triple play’ savings of federal, state and FICA tax.
Additional optional provisions
- Contribution Adjustments: Employers can allow employees to change their FSA contributions for plan years ending in 2021 without the need for a qualifying life event.
- Post-Termination: Employers can allow terminated employees to continue receiving reimbursements from unused benefits or contributions through the end of the plan year when participation ended. Most employers opt to limit termed employees to shorter reimbursement windows, thus reducing risk to the employer forced to reimburse uncollected payroll deferrals.
- For dependent care FSAs, these include the carryover for unused funds, the extension of grace periods, and contribution adjustments as adjusted in the medical FSA. Furthermore, reimbursement expenses can be permitted for children up to age 14 instead of up to age 13.
What Else Should Employers Know?
Thankfully, we have time to make these changes in plan documents. Plan amendments must be made by the end of the first calendar year beginning after the end of the plan year in which the amendment is effective (for example, calendar 2020 plan amendments must be adopted on or before December 31, 2021).
The law is quite voluminous, and additional IRS guidance may be forthcoming. We cannot provide legal or tax advice regarding this law or its requirements. For those questions, you should consult your own counsel.