FSA Plan Provisions & Clarifications in CAA, 2021
The 2021 Consolidated Appropriations Act (CAA) announced in January included several temporary provisions to help reduce financial hardship for employees who participate in a Flex plan(s) with a plan year that ends in 2020/2021. As a follow-up, the government released IRS Notice 2021-15 (on Feb 18) to add and clarify some provisions in the CAA.
Below is a summary of the additions and clarifications specific to Flexible Spending Accounts (FSAs) — Healthcare FSA (general and limited purpose) and Dependent Care FSA.
As a reminder, the relief provisions contained in the CAA and IRS Notice 2021-15 are not mandated provisions. Employers may adopt any or all provisions for their Flex plan(s).
NEW: Election Changes Allowed for Employer-Sponsored Health Coverage
For plan years ending in 2021, a Section 125 Plan may permit employees who are eligible to make salary reduction contributions under the plan to take any of the following actions (this is the same as what was allowed in 2020 under the CARES Act):
- Employee may make a new health coverage election on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage.
- Employee may revoke an existing health coverage election and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis.
- Employee may revoke an existing health coverage election on a prospective basis, provided that the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer.
Clarification on Election Changes for Healthcare and Dependent Care FSA Plans
For plan years ending in 2021, plans may allow eligible employees (not just plan participants) to prospectively revoke, increase, decrease, or make a new FSA election midyear, regardless of whether the basis for the change meets IRS election change requirements. NOTE: References to FSA include Healthcare FSAs, Limited Purpose FSAs, and Dependent Care FSAs.
Amounts contributed to a Flex plan after a revised election can be used for eligible expenses incurred during the first plan year beginning on or after January 1, 2021, even if the employee was not enrolled in the FSA on January 1, 2021.
Expanded Provision for HSA Plans
Cafeteria plans may be amended to allow an employee to make a midyear election to be covered by a general-purpose Healthcare FSA for part of the year and an HSA-compatible Healthcare FSA for part of the year. Absent a limited purpose FSA (LPFSA), the participant can forfeit any balance in the general purpose HFSA and enroll in an HSA.
Employers are permitted to amend their plans to offer employees a choice between an HSA-compatible LPFSA or general-purpose HFSA during the period to which the carryover or the extended grace period applies. Prior to this notice, LPFSAs could only be established upon the renewal date of the cafeteria plan.
An employer that adds an HSA Plan for the first time or a Limited Purpose FSA (LPFSA) has more options for the participant in a general Healthcare FSA to affect changes to coverage in order to attain and maintain eligibility in a Health Savings Account (HSA). Those allowable changes include:
- Going from a general-purpose Healthcare FSA to a limited purpose Healthcare FSA
- Revoking a general-purpose Healthcare FSA election in the absence of a limited purpose Healthcare FSA
Clarification on FSA Plan Carryover Relief
Per the CAA, cafeteria plans may allow a carryover to the next plan year of all or part of the unused amounts remaining in a Healthcare FSA or Dependent Care FSA as of the end of a plan year ending in 2020 or 2021.
The clarification in the Notice explains this carryover allowance further in that employees may be required to enroll in the Flex plan with at least a minimum election amount to have access to unused amounts from the previous plan year (if employer directed). Employers may also add a limit to carryover amounts for the period during which carryovers can be used.
Clarification on the FSA Plan Carryover and Grace Period General Rule
The carryover and grace period relief are available to cafeteria plans that currently have a grace period or allow carryovers and those that do not.
Employers may adopt the relief for only some participants (subject to the Code’s nondiscrimination rules) but may not adopt both forms of relief for the same FSA for a particular plan year.
Amounts carried over or available for use during an extended grace period do not count toward the following year’s annual limit for contributions under the Code. Regular rules for carryovers and grace periods will apply for plan years ending in or after 2022.
Clarification on Interaction with COBRA
For plans that adopt the carryover or grace period provisions, COBRA premiums are not to include unused amounts carried over or available during an extended grace period.
Note: Additional COBRA provisions are included under the American Rescue Plan.
Clarification on Plan Amendment/SMM Deadline
The Notice clarifies that the deadline for amendments/SMMs for provisions under the CAA is by the last day of the calendar year that follows the end of the plan year for which the change was made. See an example scenario below:
“For example, if an employer sponsors a calendar year § 125 cafeteria plan with a healthcare FSA that provides for a $550 carryover (from 2020 to 2021) and amends the plan to carry over the entire unused amount remaining in employees’ health FSAs as of December 31, 2020, to the 2021 plan year, the amendment must be adopted by December 31, 2021. An amendment for the 2020 plan year of a non-calendar year plan, however, must be adopted by December 31, 2022, because the last day of the first calendar year beginning after the end of the 2020 plan year that ends in 2021 is the last day of 2022.”
We encourage Plan Sponsors to communicate the applicable plan changes to their employees so they fully understand which areas of the relief package are available under your plan.
For current clients with questions about your existing FSA plan(s), call our customer service team at 800-372-3539.