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FSA Stimulus Bill Offers Flexibility and Relief for Employees

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In addition to PPP 2.0, ERC and other tax incentives included in the Consolidated Appropriations Act, 2021 (CAA), which have been covered in BP Blasts already, there are some other important items to address for businesses and employees. Some new provisions to the CAA offer a variety of provisions to employer-sponsored health and welfare plans. In particular, there are five new Flexible Spending Arrangements (FSAs) amendments that may help employees hold onto money they may have otherwise forfeited. Additionally, these optional, temporary amendments offer increased flexibility for when funds may be used. Both the health care (HC) and dependent care assistance plan (DCAP) FSA changes allow employers to amend their plans retroactively, providing opportunities to carryover unused balances from the previous year. Below is a summary of changes available to employers to amend for their FSA plan documents.

1. Unrestricted Carryover

Employers may temporarily amend their plan to allow carryover of all unused FSA dollars for both HC and DCAP FSAs. This change may be made from 2020 to 2021 as well as 2021 to 2022. The DCAP plans previously did not allow any carryover of funds and the HC FSA funds were limited to $550 carryover.

Plans may not offer both a grace period and a carryover. The plan sponsor must decide which of these they offer to their employees.

2. Extension of Grace Periods

Employers may temporarily adopt a twelve month grace period for unused benefits or contributions in HC and DCAP FSA plans. The new provision allows this grace period for both 2020 and 2021 plan years. Previously the grace periods allowing participants to use remaining contributions after the end of the plan year were limited to two and a half months after the plan year ended.

Plans may not offer both a grace period and a carryover. The plan sponsor must decide which of these they offer to their employees. 

3. Post-Termination Reimbursements from Health Care (HC) FSAs

This option allows employers to permit terminated employees to receive reimbursements for qualifying expenses incurred through the end of the plan year in which they were terminated. This includes any applicable grace period should an employer elect to adopt as outlined above. This change is also currently a temporary rule for plan years 2020 and 2021.

4. Increased Maximum Age of Eligible Dependents for Use of DCAP Funds

Employers are allowed to permit reimbursement of DCAP expenses of eligible children who attain age 14 (rather than 13) during the 2020 plan year. Prior to this temporary rule, DCAP funds could not be used for expenses for children over the age of 13. Any new 2021 election will still be subject to the regular under 13 age limit.

5. Flexibility for Mid-Year Election Changes

This option allows employers to permit DCAP and HC FSA participants to make prospective changes to their elections for plan year 2021, without a qualifying change in status. There are additional specifics on what is allowed here so employers are encouraged to speak with their benefits broker and plan vendors to review limitations on these changes. Employers are also allowed to impose some restrictions on changes by employees (e.g. employees may not decrease or stop elections if they have spent more than they have withheld).

There are deadlines for making plan amendments. Employers wishing to adopt one or more of these temporary rules may do so on a retroactive basis no later than the last day of the first calendar year following the year in which the amendment is effective.

Employers should work closely with their benefits broker to discuss how each of these amendments may impact their employees and business. Additionally, FSA plan vendors should also have helpful, easily amended documents to assist with these changes.

Additional guidance is expected from the IRS and needed on a few of these temporary amendments. Employers are encouraged to work with their benefits brokers and FSA Vendors to ensure any adoptions of the aforementioned options are advisable.

Berntson Porter is here to help businesses navigate these challenging times. Visit our Resource Center for up-to-date information about COVID-19 legislation that impacts you and your business