IRS Guidance for Temporary FSA ReliefFebruary 24, 2021 Alert
The most recent guidance provides clarity and allows for greater flexibility by plans adopting the temporary relief for FSA plans passed as part of the Consolidated Appropriations Act (CAA).
On February 18, 2021, the IRS issued Notice 2021-15 related to the temporary FSA relief passed as part of the Consolidated Appropriations Act (CAA) in December 2020. The relief allows plans to temporarily allow carryover of unused FSA funds to the next plan year or adopt an extended grace period, among other relief. The most recent guidance provides clarity and allows for greater flexibility by plans adopting the temporary relief for FSA plans.
IRS Notice 2021-15 clarifies that employers may limit the amount of the carryover and even require the carryover be used by a specific date in the new plan year. The carryover relief can be adopted by plans that currently have the carryover or grace period, in addition to plans that do not currently have either feature. However, the guidance does make it clear that a plan cannot adopt both the carryover relief and extended grace period relief.
Grace Period Extension
Under the new guidance, a plan may adopt an extended grace period that is less than 12 months, but in no instances can be it longer than 12 months. The extended grace period relief can be adopted by plans that currently have the carryover or grace period, in addition to plans that do not currently have either feature.
Importantly, the CAA did not change how Health FSAs interact with health savings account (HSA) eligibility, so employers will want to carefully consider how the implementation of these rules might impact an employee’s eligibility for an HSA in either 2021 or 2022. The IRS discusses the implications the relief has on HSA eligibility in Notice 2021-15.
Under the CAA, a health FSA may be amended to permit participants who cease participation in the plan in calendar year 2020 or 2021 to continue to receive reimbursements from unused benefits through the end of the plan year in which participation ceased (including any grace period, and any grace period extensions provided under new temporary relief). This is similar to rules which may currently be applied to dependent care FSAs. Typically, a terminated employee would only have access to remaining Health FSA funds by electing COBRA.
The new guidance explains how this relief may interact differently with a plan that adopts the carryover relief versus a plan that adopts the grace period relief. Specifically, termed participants will not have as long to incur claims in a plan that adopts the carryover and post-termination reimbursement relief because the carryover does not extend the time to incur claims into the subsequent plan year.
Special Rule for Dependents Who Aged Out
IRS Notice 2021-15 confirms that the “age out” relief is limited, and only certain employees are eligible. An eligible employee is one who (A) is enrolled in a dependent care assistance program for the last plan year with respect to which the end of the regular enrollment period for the plan year was on or before January 31, 2020, and (B) has one or more dependents who reach the age of 13 either (i) during that plan year, or (ii) in the case of an employee who has unused dependent care amounts for that plan year, during the subsequent plan year.
Regarding reimbursements, Notice 2021-15 provides that when a plan adopts the “age out” relief, all amounts from the most recent plan year with respect to which the end of the regular enrollment period was on or before January 31, 2020, maybe applied to dependent care expenses for a dependent who reached age 13 during that plan year. Additionally, unused amounts from that plan year (the first plan year) can be used to reimburse dependent care expenses during the subsequent plan year for a dependent that reached age 13 during the first plan year (until that dependent reaches age 14) and for a dependent who reaches age 13 during the subsequent plan year.
Prospective Election Changes
In addition to permitting employees to make prospective changes to their health FSA and Dependent Care FSA elections for the 2021 plan year, the new guidance also allows prospective changes to elections for employer-sponsored health coverage (medical, dental, or vision coverage).
This relief is similar to the relief provided in Notice 2020-29 this past summer and keeps the same rules. Specifically, an employer may amend its plans to allow employees to: (1) make a new election for employer-sponsored health coverage on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage; (2) revoke an existing election for employer-sponsored health coverage and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis (including changing enrollment from self-only coverage to family coverage); or (3) revoke an existing election for employer-sponsored health coverage 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.
Plans adopting any of the plan design changes permitted by the CAA and Notice 2020-15 must be amended by the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective. For example, a plan adopting the carryover for the Dependent Care FSA plan year ending December 31, 2020, must adopt the related plan amendment by December 31, 2021. In addition, the plan must be operated in accordance with the terms of the amendment from the date the amendment is effective, even if prior to the actual amendment adoption date.
While this guidance provides added flexibility, clients should review their options with their benefits advisor and TPA. Paylocity’s Spending Accounts and COBRA Services Team is working to support this new relief and will release further information about how to make these optional changes to your Paylocity Spending Accounts plans soon. If you have questions, please contact your dedicated Support Specialist.
Thank you for choosing Paylocity as your Payroll Tax and HCM partner. This information is provided as a courtesy, may change and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor.