Updated 12/29/20 with clarification to the provision allowing post-termination reimbursements from health FSAs.
Updated 12/28/20: President Trump signed the COVID-19 stimulus bill into law on December 27, 2020.
Note: As of 12/23/20, President Trump still needs to sign the COVID stimulus bill into law.
On December 21, 2020, Congress passed a COVID-19 stimulus bill (“bill”), which contains significant changes to health flexible spending arrangements (FSAs) and dependent care (DC) FSA rules for the 2020 and 2021 plan years. Section 214 of the bill, entitled “Temporary Special Rules for Health and Dependent Care Flexible Spending Arrangements” (temporary rule), permits employers to make the following changes:
Carryover from 2020 and 2021 Plan Year: For plan years ending in 2020 or 2021, health FSAs and DC FSAs can permit participants to carry over any remaining unused funds into the next plan years (ending in 2021 or 2022).
- General Rule: Under the use-it-or-lose-it rule, employees forfeit unused health FSA and DC FSA funds at the end of the plan year. Health FSAs may allow for a grace period (a period of up to 2 ½ months after the end of the plan year to incur new claims) or a carryover provision (up to $550 in unused amounts to be used for the next plan year), but not both. DC FSAs can allow for a grace period but are not permitted to have a carryover provision.
- Temporary Change: The temporary rule allows DC FSAs to permit carryovers and increases the carryover amount to “any unused benefits or contributions remaining” in the health FSA or DC FSA. It does not appear that the temporary rule limits the amount that can be carried over.
Extension of Grace Periods: For plan years ending in 2020 or 2021, health FSAs and DC FSAs can extend the plan’s grace period to 12 months after the end of the plan year. During the extended grace period, participants have additional time to use any remaining funds from the prior plan year on claims incurred during the prior plan year or during the grace period.
- General Rule: Health FSAs and DC FSAs may allow for a grace period of up to 2 ½ months after the end of the plan year to incur new claims.
- Temporary Change: The temporary rule allows for a longer 12-month grace period to incur and use any leftover amounts from the prior plan year.
Employer Tip: Generally, individuals that are covered during a health FSA grace period are ineligible for a health savings account (HSA) (i.e. they cannot make or receive HSA contributions) until the first of the calendar month after the grace period ends. This means that an extension of the grace period (as provided under the temporary rule) may cause individuals to be ineligible for a HSA for a longer period. It is important to note that individuals who have a $0 balance at the end of the plan year will be HSA-eligible during a grace period; on the other hand, employees who have a balance at the end of the plan year will be automatically ineligible for HSA contributions for the remainder of the grace period. Employers should consider the impact on HSA eligibility when determining whether they want to adopt the extended the grace period.
Post Termination Reimbursements from Health FSAs: Health FSAs can allow employees who cease participation in a plan during calendar years 2020 or 2021 to continue to incur claims and receive reimbursements from unused amounts through the end of the plan year in which participation ceased (including any grace period or modified grace period allowed under the temporary rules). In effect, the temporary rule allows employers to implement a spend down period for terminated employees.
For example, if an employer adopts this temporary change for their plan year, an employee who has $100 remaining in their health FSA when they are terminated on July 1, 2021, has until the end of the plan year (December 31, 2021) to use the $100 toward claims incurred prior to and after the termination until the end of the plan year. If an employer also adopts a 12-month grace period, the terminated employee would have until December 31, 2022 to use the $100.
- General Rule: Health FSAs can provide a 90-day run-out period to submit FSAs claims incurred prior to termination.
- Temporary Change: Plans can allow terminated employees incur and spend remaining amounts until the end of the plan year.
Employer Tip: Employers have the option of adopting this provision prospectively and providing notice of the change to their current employees. If an employer decides to adopt this provision retroactively, it would be best practice to notify terminated employees who had remaining health FSA funds when they were terminated so they could take advantage of the ability to use the FSA dollars.
Special Carry Forward Rule for DC FSA Where Dependent Aged Out During Pandemic: The temporary rules allow certain “eligible employees” to use DC FSA funds for dependent children who have “aged out,” or turned 13, during the pandemic. The temporary rules apply to plan years with open enrollments that ended on or before January 31, 2020 (e.g. calendar year 2020 plans) and subsequent plan years (e.g. calendar year 2021 plans) to the extent an employee has leftover funds at the end of the 2020 plan year after any temporary changes adopted by the employer (e.g. extended grace period or carryover).
Eligible employees include those who enrolled in a DC FSA for the plan year that had open enrollment before January 31, 2020 and:
- Has one or more dependents that turn 13 during the plan year for which they are enrolled in DC FSA; or
- Has amounts remaining at the end of the plan year and has one or more dependents who turn 13 during the subsequent plan year (in this case, employees can only apply the remaining balances from the prior plan year for expenses incurred by children who turn 13).
For example, an employee enrolls in a plan year DC FSA on January 1, 2020 and at the end of the plan year they have $500 remaining in DC FSA funds. The employer adopts a carryover under the temporary rules and the $500 is carried over into the 2021 plan year. If the employee’s dependent turns 13 in the 2021 plan year, the employee can use the $500 in rollover funds for that dependent child’s (who has not attained age 14) eligible expenses.
- General Rule: Employees can use DC FSA funds to pay for eligible expenses for dependent children who have not attained the age of 13 (12 years and under). This means that expenses are not reimbursable for a dependent child after they turn 13 (e.g. if a child turns 13 mid-year in June, expenses incurred after June will not be reimbursable from the DC FSA).
- Temporary Change: The temporary rules increase the age of a qualifying child to 13 years or younger for purposes of reimbursing DC FSA funds (in other words, a child who has not attained age 14).
Change in FSA Elections: For plan years ending in 2021, employers with health FSAs and DC FSAs can allow employees to prospectively modify their own contributions (up to the annual IRS maximum) without a valid change in status event. For administrative ease, employers may want to set parameters around when employees will be allowed to make changes. For example, employers may want to allow employees to change their elections during certain designated times of the year. This limitation would prevent employees from repeatedly making election changes and necessitating adjustments to payroll deductions.
- General Rule: Under Section 125 regulations, employee elections must be made prior to the first day of the plan year and cannot be changed unless a Section 125 permitted status change event (i.e. a “qualified life event”) occurs allowing them to make changes.
- Temporary Change: The temporary rule permits employers to allow employees to make prospective changes without a status change event.
Plan Amendments: Employers can retroactively amend their health FSAs and DC FSAs plan documents to adopt the temporary changes if:
- The amendment is adopted before the last day of the calendar year following the end of the plan year in which the amendment is effective; and
- The plan is operated consistent with the terms of the amendment during the period beginning on the effective date of the amendment and ending on the date the amendment is adopted.
For example, if an employer wants to retroactively adopt a plan amendment for a calendar year plan that runs from January 1, 2020 to December 31, 2020, the amendment allowed under the temporary rule must be adopted by December 31, 2021.
- General Rule: Plan amendments cannot be adopted retroactively.
- Temporary Change: Plan amendments to adopt changes allowed under the temporary rule can be adopted retroactively if certain requirements are met.
Comparison of the General Rules and the Temporary COVID-19 Changes
|General Rule||Temporary COVID-19 Changes|
|Carryover||Health FSAs may allow employees to carryover up to $550 in unused amounts to the next plan year. DC FSAs are not permitted to have a carryover provision.||For plan years ending in 2020 and 2021, FSAs and DC FSAs may permit participants to carryover any unused benefits or contributions to the next plan year.|
|Extension of Grace Periods||Health FSAs and DC FSAs can allow for a grace period of up to 2 ½ months after the end of the plan year.||For plan years ending in 2020 or 2021, FSAs and DC FSAs can extend the grace period for up to 12 months after the end of the plan year.|
|Post-Termination Reimbursements from Health FSAs||Health FSAs can provide a 90-day run-out period to submit FSA claims incurred prior to termination.||FSAs can allow an employee who ceases participation in the plan during calendar year 2020 or 2021 to incur claims and receive reimbursements from amounts through the end of the plan year in which participation ceased (including any grace period).|
|Qualifying Dependent for DC FSAs||Individuals can use their DC FSA to pay for eligible dependent expenses of a qualifying child under the age of 13.||Eligible employees can use their DC FSA to pay for eligible expenses of a child who turned 13 during the pandemic.|
|Change in Election Amount||Under Section 125 regulations, employee elections must be made prior to the first day of the plan year and cannot be changed unless a Section 125 permitted status change event (i.e. a “qualified life event”) occurs allowing them to make changes.||For plan years ending in 2021, a FSA or DC FSA can allow employees to prospectively change their election without regard to any change in status.|
- Determine if your company wants to adopt any of the provisions allowed under the temporary rule.
- Employers with calendar year FSA and/or DC FSAs (plans that end December 31, 2020) should decide whether to allow for the expanded carryover/grace period as soon as possible so that any left-over funds from the 2020 plan year can be used in the new plan year.
- Employers who adopt any of the temporary provisions should amend their plan documents accordingly and notify plan participants of those amendments promptly so employees can take advantage of the changes.
- Employers should work directly with their program vendor or legal counsel to complete these tasks/plan amendments.
- COVID-19 Stimulus Bill (December 21, 2020)
Disclaimer: This content is intended for informational purposes only and should not be construed as legal, medical or tax advice. It provides general information and is not intended to encompass all compliance and legal obligations that may be applicable. This information and any questions as to your specific circumstances should be reviewed with your respective legal counsel and/or tax advisor as we do not provide legal or tax advice. Please note that this information may be subject to change based on legislative changes. © 2020 Sequoia Benefits & Insurance Services, LLC. All Rights Reserved