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Updated 1/18/2021

Legislation was passed by Congress on 12/21/2020 and it was signed into law on 12/27/2020. The COVID-19 Relief Bill is referred to as the Consolidated Appropriations Act of 2021. The legislation has significant and positive implications for FSAs for 2021 and 2022. The statute allows for:

Carryover Changes for Health Care FSAs (HCFSA) and Dependent Care FSAs (DCFSA) 

  • This option applies to Flexible Spending Accounts with plan years ending in 2020 or 2021. It effectively removes the carryover cap by allowing ALL unused funds from plan years ending in 2020 to be carried over to the plan year that ends in 2021 and ALL unused funds from plan years ending in 2021 to be carried over to the plan year that ends in 2022.
  • This provision applies to both HCFSAs and DCFSAs.
  • This has a very significant and positive impact on DCFSAs as carry over has never been allowed before. 
  • The legislation did not change how much a DCFSA participant can be reimbursed, which remains at $5,000 per year.
  • This may affect an individual’s eligibility for a Health Savings Account (HSA).
  • There is no advantage to offer both a carryover and grace period.

Grace Period Extensions for Health Care FSAs (HCFSA) and Dependent Care FSAs (DCFSA)

  • This option provides additional time for participants to incur eligible expenses by extending the normal 2 month and 15 day grace period to 12 months for plan years ending in 2020 or 2021.
  • For example, a calendar year plan (12/31/2020) with a grace period that ends on 3/15/2021 can now extend that grace period until 12/31/2021.
  • The extension of grace periods goes for 12 months after the end of the 2020 or 2021 plan year(s).
  • This may affect an individual’s eligibility for a Health Savings Account (HSA).
  • There is no advantage to offer both a carryover and grace period.

Post-termination Reimbursements from a Health Care FSA (HCFSA)

  • For HCFSAs, plan participants who terminated during the 2020 plan year or who terminate during the 2021 plan year are allowed to spend down any unused ‘benefits or contributions’ through the end of the plan year in which their termination occurred.
  • The term ‘benefits or contributions’ is a new phrase and means only contributed and unused amounts in the FSA at the termination of participation are available for reimbursement.
  • Applies to unused contributed dollars that remain in the FSA at the point of termination of participation.
  • Former participants can continue to incur expenses and receive reimbursements from unused contributions through the end of the plan year in which their participation ended.
  • This may affect an individual’s eligibility for a Health Savings Account (HSA).

Mid-Year Election Change Relief

  • Participants may prospectively change their election amount for a HCFSA and/or DCFSA for plan years ending in 2021.
  • The election amount change does not need to have a corresponding change in status or qualifying life event.
  • Employers can limit mid-year election changes so that participants do not reduce their election to an amount less than what they have already been reimbursed.
  • This change automatically applies to all FSA plans and does not require the employer to elect.

Relief for Unused 2020 Dependent Care FSA (DCFSA) Funds

  • Traditionally DCFSA funds could be used for qualifying individuals that included dependents who were under age 13.
  • The Act temporarily modifies the qualifying dependent age to include children under age 14.
  • The Act allows 2020 DCFSA funds to be used for a child who is under age 14 in 2020.
  • DCFSA carryover funds may be used for a child who is under age 14 during the 2021 plan year.

Employers must have their plan documents amended for the above changes.

There will likely be additional questions in the future regarding the legislation. DBS is working closely with other professionals on this important legislation, including our national association Employers Council on Flexible Compensation (ECFC) and DeWitt LLP Law Firm. Additional information will be provided as it becomes available.

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