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Consolidated Appropriations Act Added Flexible Spending Account Options

By James R. Olson / Jan 25, 2021

In late December, President Trump signed The Consolidated Appropriations Act (CAA) into law. The law makes temporary changes to the rules governing health flexible spending accounts (Health FSAs) and dependent care flexible spending accounts (Dependent Care FSAs). These changes were made to assist employees affected by the COVID-19 pandemic who were unable to utilize amounts they contributed to their FSAs. Employers should note that these changes are voluntary and to the extent implemented, will eventually require plan amendments.

Health FSA changes

  • Carryovers of Unused Benefits: An employer may permit Health FSA participants to carry over any unused benefits or contributions remaining in their Health FSAs from plan years ending in 2020 (which for a calendar year plan would simply mean the 2020 plan year) to the plan year ending in 2021(the 2021 plan year for a calendar year plan). In addition, amounts remaining at the end of the 2021 plan year may be carried over into the plan year ending in 2022.
  • Extension of Grace Period: For plan years ending in 2020 or 2021, an employer may extend a Health FSA’s grace period up to 12 months after the end of the plan year. Ordinarily, the grace period may not extend more than 2.5 months after the end of the plan year.
  • Post-Termination Reimbursements: An employer may permit an employee who stops participating in a Health FSA during 2021 to continue to receive reimbursements from unused amounts through the end of the 2021 plan year. This rule does not require that the participants make further contributions to access their unspent funds. In addition, if a grace period is offered, the participant may continue to receive reimbursements from unused benefits or contributions through the duration of the grace period, even if such grace period has been extended as permitted by the CAA.
  • Change in Employee Elections: For plan years ending in 2021, an employer may permit employees to make prospective elections to modify the amount of their contributions to a Health FSA without regard to whether a qualifying life event has occurred. The post-change election amount may not exceed the applicable $2,750 limit for 2021 Health FSAs.

Dependent Care FSA changes

  • Carryovers of Unused Benefits: As with Health FSAs, an employer may permit Dependent Care FSA participants to carry over any unused benefits or contributions remaining in their Dependent Care FSAs from plan years ending in 2020 to the plan year ending in 2021, and amounts remaining at the end of the plan year ending in 2021 to the plan year ending in 2022.
  • Extension of Grace Period: For plan years ending in 2020 or 2021, an employer may extend the Dependent Care FSA grace period from 2.5 months to up to 12 months after the end of the plan year.
  • Change in Employee Elections: For plan years ending in 2021, an employer may permit employees to make prospective elections to modify the amount of their contributions to a Dependent Care FSA without regard to whether a change in status has occurred. The post-change election amount may or may not exceed the applicable 2021 annual dollar limit applicable to Dependent Care FSAs ($5,000 for unmarried individuals or joint filers, $2,500 for married filing separately).
  • Carry-Forward Opportunity for Aged-Out Dependents: The CAA increases the maximum age of a dependent for purposes of incurring eligible Dependent Care FSA expenses from 13 to 14. This extension applies to the last plan year for which the enrollment period ended by Jan. 31, 2020. For most employers, this will be the 2020 plan year. Also, if such a participant has a dependent who turned 13 during the 2020 plan year and has unused amounts in the Dependent Care FSA at the end of that plan year, these amounts may be “carried over” or subject to an extended grace period. These unused amounts would be determined as of the FSA’s claims submission deadline for the 2020 plan year after applying the extension.

As previously noted, all of these changes are permissible, not mandatory.  However, employers that choose to adopt these changes will require that they amend their plans.  Changes effective in 2020 must be reflected in a plan amendment adopted by December 31, 2021, while changes effective in 2021 must be reflected in a plan amendment adopted by December 31, 2022. Of course, a single amendment adopted sometime before the end of 2021 could adopt the change for both 2021 and 2022. In all cases, the FSA must be operated consistent with the terms of such amendment from the effective date of the change to the date the amendment is adopted.