With the pandemic continuing to impact every-day operations of most businesses, opportunities to take advantage of the flexible spending account relief offered in the Consolidated Appropriations Act of 2021 (“CAA”), passed at the end of December 2020, may not be top of mind for most employers. However, the numerous considerable benefits created by the CAA should not be overlooked. There is still time to take advantage of key relief under the CAA, and herein we outline six easy steps to do so:
- Understand your FSA Offerings:
a. Health Care Flexible Spending Account. Is there a health care flexible spending account that reimburses employees for health care expenses with pre-tax dollars? If so, is there a carryover or grace period to spend down unused funds in the account at the end of the year, rather than allowing all unused funds to be forfeited?
b. Dependent Care Flexible Spending Account. Is there a dependent care flexible spending account to reimburse employees for childcare related expenses with pre-tax dollars? Is there a grace period to allow extra time for employees to incur expenses for unused funds after the end of the year before funds are forfeited?
- Consider Health Care FSA End of Year Relief (avoiding forfeiture of unspent funds):
a. Grace Period. If there is a grace period to spend down unused 2020 funds during the first few months of 2021, it can be extended to 12/31/2021. Any unspent 2020 funds remaining after 12/31/2021 will be forfeited. The grace period may also be extended for unspent 2021 funds until 12/31/2022.
b. Carryover. If there is a carryover of up to $550 of unspent 2020 funds to 2021, it can be increased to include all unspent funds. This can be implemented for unspent 2020 funds going into 2021, and unspent 2021 funds going into 2022.
c. Grace period to Carryover, and vice versa. If there is a grace period for unspent 2020 funds, a carryover may be implemented the following year so that all unspent 2021 funds are carried over into 2022. Likewise, though many employers appreciate the flexibility of the carryover option, a carryover may be used in going into 2021 and a grace period may be adopted going into 2022.
- Consider Dependent Care FSA End of Year Relief (avoiding forfeiture of unspent funds):
a. Grace Period. Similar to step 2.a above, if a grace period is available for unspent 2020 dependent care flexible spending account funds, it can be extended to 12/31/2021. This can also be implemented for unspent 2021 funds through 12/31/2022.
b. Carryover. A carryover is now available for dependent care flexible spending accounts. Similar to step 2.b above, a carryover may be implemented prospectively for all unspent 2020 and 2021 funds. Talk to your flexible spending account administrator and legal counsel about whether it is too late to do this for unspent 2020 funds.
c. Grace period to Carryover, and vice versa. See this section in step 2.c – the same considerations apply.
- Consider Health Care and Dependent Care FSA Mid-Year Relief: Employees may prospectively enroll in, increase or decrease (including down to $0) flexible spending account elections without a qualifying life event during the 2021 calendar year. The relief may be offered once, twice, or as many times as needed (so long as the fsa administrator is able to administer the changes, check with them). Because the entire health care flexible spending account election is available at the start of the year (before employee contributions are made), make sure to communicate that employees may not decrease health care flexible spending account elections to less than the expenses that have already been reimbursed. With regard to the dependent care flexible spending account, make sure employees understand that any contributions they have already made will not be returned to them. Any change is prospective, rather than retroactive.
- Consider Additional Relief Options:
a. Health care flexible spending account spend down provision through 12/31/2021 for employees who terminate enrollment in the plan during the 2021 calendar year.
b. A similar dependent care flexible spending account spend down provision to the one described above in 5.a is available under proposed regulation 1.125-6(a)(4)(v) (amendment needed to implement this).
c. Dependent care flexible spending account one-year extension for dependent children who turned 13 and aged out in 2020.
- Coordinate with the FSA Administrator and Amend the Cafeteria/Section 125 Plan: Coordinate the above relief options with the flexible spending account administrator to make sure they are able to administer the desired changes. A cafeteria plan/ section 125 plan amendment will also be needed on or before 12/31/2021 (aside from the dependent care flexible spending account spend down option, for which an amendment will be needed at the time it is implemented). For assistance with the amendment, reach out to the flexible spending account administrator and legal counsel.