The stimulus package that President Trump signed includes several provisions of significance to employee benefit plans, including measures that respond to the effects of the COVID-19 pandemic on health and dependent care flexible spending arrangements (FSAs). FSAs typically allow employees to make contributions on a pre-tax basis through a cafeteria plan and use those contributions to pay for qualifying medical and child care expenses, without being taxed on the reimbursements. During the COVID-19 outbreak, employees and their family members may have foregone medical care that factored into their health FSA elections for 2020. Their child (or elder) care arrangements may have been disrupted in ways that also prevented them from using amounts contributed to their dependent care FSAs.
Under special measures introduced last spring, employers could have amended their plans to allow employees to stop making new elections on a prospective basis. However, in a year filled with tumult and uncertainty, not all employers implemented that change and not all employees took advantage of the opportunity to change elections, if offered. Even in the best of circumstances, amounts contributed prior to an election to stop contributions could not be returned. As a result, employees may have unused amounts remaining in their FSAs without expenses to apply them.
Cafeteria plan rules ordinarily require FSA contributions to be used for expenses incurred within the year of contribution, or else they will be forfeited. The rules carve out limited exceptions that allow plans to either tack an additional 2.5-month grace period on to the end of the plan year for participants to incur expenses that may be reimbursed from the prior year’s contributions, or carry up to $550 (recently indexed up from $500) from health FSA contributions over to the next year. The new rules expand on these rules and provide several additional, temporary mechanisms that employers may introduce to their plans to avoid forfeitures of FSA contributions:
- Increased Carryover Opportunities. Employers may amend their plans to allow employees to carry over all unused amounts in an FSA from a plan year ending in 2020 to a plan year ending in 2021 and from a plan year ending in 2021 to a plan year ending in 2022. This amount is not subject to a dollar cap and applies to dependent care FSAs as well as health FSAs.
- Expanded Grace Period. Employers may amend their plans to allow for a grace period of 12 months, expanding on the usual 2.5-month period. This extension may be added on to plan years ending in 2020 or 2021. Like the current grace period rules, it applies to both health and dependent care FSAs.
- Post-Termination Expenses. Employees who stop contributions to a dependent care FSA mid-year have historically been able to use up amounts remaining in their accounts to pay for expenses incurred later in the plan year. This opportunity has now been extended to health FSAs. It applies to employees who stop their contributions in calendar years 2020 and 2021. Expenses incurred during an applicable grace period may also be used to exhaust an account.
- Dependent Care Age Limit. Ordinarily, reimbursements for child care from a dependent care spending account are limited to expenses incurred for children who have not yet reached age 13. Employers may now amend their plans to allow reimbursements for expenses incurred for dependent children up to age 14. Application of the rules can be complicated. For calendar year plans, the employee needs to have been enrolled in the dependent care FSA for 2020. If so, reimbursements from 2020 contributions may be made for expenses incurred for a dependent child who reaches age 13 in 2020 even after that child’s 13th birthday. If the employee has any unused account balance at the end of 2020, reimbursements not to exceed the amount of that unused balance may be used for that child until the child’s 14th birthday and for any other dependent child who turns 13 in 2021 after that child’s 13th birthday.
- Mid-year changes. A plan may be amended to allow employees to make a prospective mid-year change in the amount they contribute to an FSA without regard to whether any of the events usually needed to justify the event apply. This relaxation of the rules that usually apply to mid-year changes applies only for plan years ending in 2021.
Rules that otherwise apply with regard to cafeteria plans and FSAs remain in effect. For example, it appears that employers must still choose between offering a carryover or a grace period. They may not offer both. Employers with high deductible health plans must still be wary of the effect that carryovers and grace periods will have on their (and their employees’) ability to make contributions to a health savings account. Perhaps most importantly, employers will need to keep in mind the temporary nature of the relief that is offered and not assume that it will be extended beyond the periods provided.
Employers that operate in accordance with the new rules will generally have until the end of 2021 to amend their plans to account for the changes.