IRS COVID Guidance: The One About FSAs
To echo my colleague in another post, in nearly 20 years of practice I have never seen so much benefits related guidance in such a short period of time. It seems like just yesterday the IRS and DOL issued a joint notice providing some deadline relief for COBRA and HIPAA related matters. Today, we receive more complex guidance when the IRS released Notices 2020-29 and 2020-33 relating to Health and Dependent Care FSAs. This post discusses the new extensions to the FSA grace period and increase in rollover amounts. A companion post discusses the other items of relief in the guidance released today.
As we all know, the rule for an FSA plan is always use it or lose it. Generally, you lose it as of the end of the plan year, unless your plan uses either the 2.5 month grace period or the rollover feature (which means you lose it all but $500 at the plan year-end). A plan with a grace period permits a participant to use up the prior year’s election into the first 2.5 months of the next plan year. For example, a participant in a calendar year plan with a grace period would have until March 15, 2020 to use up the health FSA funds that they elected for the 2019 plan year.
We have received calls from clients, especially those with non-calendar year plans, who have participants that are concerned that they will not be able to use up this FSA funds for a variety of reasons (e.g., elective surgery postponed into the next plan year). The new IRS guidance provides potential relief for these participants. Under the new guidance, the IRS will now permit (but not require) plans to extend the period of time that participants my incur claims and use up unused amounts in health or dependent care FSAs. Specifically, you may amend one or more of your plans to allow participants to apply leftover amounts in a health FSA or a dependent care FSA as of the end of a grace period or plan year ending in 2020 to claims incurred after the end of the plan year or grace period through December 31, 2020. This relief applies to all health FSAs, including limited purpose health FSAs which are compatible with HSAs.
Interestingly, the extension of time for incurring claims is available even to plans that do not have a grace period, including those plans that provide for a rollover. While this guidance is available to all FSA plans, prior IRS guidance still remains in force and continues to provide that a health FSAs may adopt either a grace period or a rollover provision, but not both. However, this prohibition doesn’t prevent those non-calendar year plans with a rollover feature from offering this extended period for use of funds through 2020.
For a plan that uses a rollover feature, the extension of time is only available for non-calendar year plans. As noted above, the extension is only available for grace periods or plan years that end in 2020. A calendar year plan using a rollover would end prior to 2020 and would not have a grace period so it would not be able use the extension. However, any health or dependent care FSA that does end in 2020 would be permitted to use the December 31, 2020 extension regardless of whether it provided for a grace period or rollover feature.
All is not lost for calendar year plans and other health FSAs that use the rollover. In addition to the extension, the IRS guidance permits a plan to increase the maximum amount for plan years starting in 2020 that may be rolled over to the immediate following plan year beginning in 2021 from $500 to $550. This amount is indexed for inflation in the future and is tied to 20% of the maximum amount of the health FSA limit for the year.
Of note is that the IRS did not provide relief on the HSA/FSA coverage rules. This means that any participant who had unused amounts at the end of a plan year or grace period ending in 2020 and who is allowed an extended period will not be eligible to contribute to an HSA during the extended period (except in the case of an HSA-compatible health FSA, including a health FSA that is amended to be HSA-compatible).
Unlike the Final Rule issued last month, this relief is COMPLETELY OPTIONAL. However, you must amend your FSA plans to take advantage of the extension or increase in rollover amount. The guidance gives you until December 31, 2021 to adopt any needed amendments retroactively as far back as January 1, 2020, as long as you are operating the plan in accordance with the terms of the amendment and you inform all employees eligible to participate in the §125 plan of the changes to the plan. Interestingly, the guidance does not specify when such notification must be given.
If you have any questions, please contact any member of the Graydon employee benefits team.
Please stay tuned for additional posts from us on the other changes included in these notices, including significant relief for participants relating to their health FSAs.