On December 27, 2020, President Trump signed year-end funding legislation that also included COVID-19 relief measures (“Stimulus Bill”). Of particular importance for employers is temporary relief regarding health care and dependent care flexible spending accounts (“FSAs”). Employers are not required to take advantage of the relief, but those who want to do so may want to act quickly to communicate the relief to employees and work with their vendors to implement the changes.
In light of the COVID-19 pandemic, many employees have been unable to spend amounts they have elected to their health care and dependent care FSAs for the 2020 plan year. For example, an employee may have elected the maximum $5,000 to a dependent care FSA in anticipation of sending children to a summer camp that was closed in light of the pandemic. Similarly, an employee may have made a $2,700 health FSA election in anticipation of having an elective procedure that was postponed due to lack of hospital availability. Though the IRS has provided mid-year election change flexibility relief (see our prior newsletter here), many employees nevertheless face the prospect of substantial forfeitures of unspent amounts pursuant to the IRS’s so-called “use-it-or-lose-it” rule that applies to FSAs. Likewise, as the pandemic continues, employees may also have faced difficulties in anticipating their 2021 expenses as they made their elections for the 2021 plan year. The Stimulus Bill provides employers with some flexibility to mitigate the negative impact of these challenges. Again, it is important to note that implementing the following rules is completely optional for employers:
- Employers may allow carryover of an unlimited amount of unspent health care and dependent care FSAs amounts from plan years ending in 2020 to the plan year ending in 2021. Similarly, employers may allow an unlimited carryover from the 2021 plan year to the 2022 plan year. Under prior law, employers could not have a carryover feature for a dependent care FSA, and the maximum carryover amount for a health care FSA was $550.
- Employers that have a “grace period”—the two-and-a-half-month period after the end of the plan year in which an employee can continue to incur expenses—for their FSAs may extend the grace period for plan years ending in 2020 or 2021 to 12 months after the end of the plan year.
- Employers may allow employees to make prospective mid-year election changes for plan years ending in 2021 for their health and dependent care FSAs, even in the absence of a mid-year election change event.
- Employers may allow a dependent care FSA to reimburse the expenses of a participant whose “qualifying child” turned age 13 during the pandemic, provided certain conditions are met.
Employers that want to take advantage of any or all of these provisions should work with their FSA vendors to ensure the vendors can administer the provisions. Employers should also consider communicating these changes to employees as soon as practicable, particularly if the employer wants to allow an unlimited carryover, as employees may seek to spend down their FSA balances before the end of the plan year in anticipation of an imminent forfeiture.
If an employer implements any of these provisions, it will have to amend its section 125 plan. Fortunately, the Stimulus Bill gives employers ample time to execute the amendment, as amendments must be adopted by the end of the calendar year that begins after the end of the plan year for which the amendment is effective.
If you have any questions regarding this LEGALcurrents®, please contact a member of the HSE Employee Benefits and Executive Compensation group.