Update 2/22/21: The Internal Revenue Service (IRS) issued Notice 2021-15 clarifying the relief provided under the Appropriations Act for health FSAs and DCAPs and provides additional cafeteria plan relief.
The Consolidated Appropriations Act, 2021 (Appropriations Act), enacted on December 27, 2020, contains temporary rules to provide relief for participants in health flexible spending arrangements (FSAs) and dependent care flexible spending arrangements (DCAPs) in light of the COVID-19 pandemic. The Appropriations Act builds on previously issued Internal Revenue Service (IRS) guidance (IRS Notice 2020-29 and 2020-33), by expanding the opportunities for plan sponsors to amend their plans to give employees additional opportunities to use their currently unused health FSA and DCAP amounts through 2022.
Carry Over of Unused Amounts
The Appropriations Act provides that health FSAs and DCAPs may permit participants to carry over any unused amounts remaining from the 2020 plan year to the plan year ending in 2021. Additionally, health FSAs and DCAPs may permit participants to carry over any unused amounts remaining in the health FSA or DCAP from the 2021 plan year to the plan year ending in 2022. IRS Notice 2021-15 clarifies that this carryover relief may be applied to plans that have a grace period, carry over, or neither. An employer has the discretion to allow the entire unused amount to be carried over or an amount less than the entire amount. An employer also has the discretion to limit the date by which the carried over amounts must be used during the subsequent plan year. Employers may allow participants to opt out of the carryover in order to have health savings account (HSA) eligibility (general purpose health FSA coverage is disqualifying coverage for HSAs). Note, the rule prohibiting health FSAs (and DCAPs) from adopting both a carryover and a grace period still applies. The IRS clarifies that amounts carried over will not be taken into account for purposes of the nondiscrimination rules applicable to Section 125 cafeteria plans and to DCAPs under Section 129. Unused amounts carried over from prior years are not taken into account in determining the annual limit applicable for the following year.
Extended Grace Period
The grace period for using health FSA and DCAP amounts has also been extended. The Appropriations Act permits health FSAs and DCAPs to extend the grace period for participants to use remaining amounts for a plan year ending in 2020 or 2021, until 12 months after the end of the plan year. IRS Notice 2021-15 clarifies that an employer has the discretion to extend the grace period to less than 12 months after the end of the plan year. IRS Notice 2021-15 further clarifies that an employer may apply this grace period for health FSAs and DCAPs that do not have a grace period, but the rule prohibiting an employer from implementing a grace period and a carryover for health FSAs (and DCAPs) still applies.
Download the full Advisor for more information on:
- Extended Grace Period
- DCAP Carry Forward
- Midyear Election Changes
- Amendment Deadline