Congress Gives Employers More Things to Consider With Their FSA Plans
2020 was a year of great uncertainty. Things were constantly changing and almost nothing was guaranteed to happen until it was actually happening. As the year was winding down, there were two things that were certain in my life each week. The first was that the UPS/FedEx truck would be making the truck down my long driveway and the second was I would get a call from a client wondering if there would be any additional FSA relief coming for participants. Now that we have flipped the page to 2021, there are fewer delivery trucks coming down my driveway and those questions from clients are changing into how or if they should implement the FSA relief provided for in the Consolidated Appropriations Act of 2021 (the “Act”).
The Act provides a number of relief items for plan participants that employers may choose to implement for their health FSA and dependent care FSA plans. All of the items are optional with an employer being able to implement some, all or none of the changes. Employers are permitted to put parameters around the changes as well (e.g., giving a one-time window to make a prospective change). Plans will need to be amended for any of the changes adopted by the employer, but the employer has until the last day of the plan year following the year of the change to adopt the plan amendment. The following is a summary of the FSA relief provided for in the Act:
- Carryovers – The $550 carryover permitted in health FSA plans is being modified for plan years ending in 2020 or 2021 such that a plan can provide that all unused amounts be carried into the next plan year. The Act also permits a dependent care FSA plans to add a carryover for the 2020 and 2021 plan years.
- Grace Periods – FSA plans that provide for a grace period (normally 2.5 months following the end of the plan year) may now extend the grace period for the 2020 and/or 2021 plan year until the end of the next plan year (e.g., a grace period normally ending on March 15, 2021 could be extended to December 31, 2021 given a participant the entire following year to use up 2020 funds).
- Election Changes – Similar to the relief provided last year in the CARES Act, an employer may amend its FSA plans to permit an employee to make a prospective election change without a change in status. This provision will be particularly helpful if the employer decides to permit a carryover of 2020 unused amounts that the employee would not have been anticipating being able to use in 2021.
- Post-Termination Reimbursements from Health FSA – The Act permits an employer to temporarily permit a health FSA participant to continue to submit claims up to the amount of the unused balance for reimbursement of expenses that were incurred after the employee’s termination of employment, but prior to the end of that plan year (or prior to the end of the grace period if the plan has a grace period). This would not take away an employee’s right to elect COBRA if they wished to continue to contribute to the plan the remainder of the year.
- Limited Extension of Dependent Care Age – Normally, expenses for care are no longer reimbursable once the dependent turns age 13. The Act permits an employer to temporarily change the maximum age of a dependent whose care is eligible for reimbursement to age 13 during the 2020 and 2021 plan years. However, in the 2021 plan year, a participant may only receive reimbursements for expenses for a child who is 13 if the participant had unused funds in their account at the end of the 2020 plan year.
There is a lot to unbundle in the Act with these changes and other benefit plan changes. While these changes will likely be very well received by plan participants, employers may not wish to implement them. Employers benefit from the use of unused account balances to offset the losses from those that spend more than they contributed and terminate mid-year and permitting these changes would likely reduce the amount of gain an employer has to offsets its loses. Allowing a carryover or grace period impacts an employee’s ability to contribute to an HSA, which can inhibit an employer from getting more employees to enroll in its HDHP. Employers may also find some of these changes too cumbersome to administer or their FSA vendors may have limitations on being able to administer the changes.
If you are interested in exploring any of these options, please reach out to a Graydon attorney and we can walk you through the decisions and things to consider.