Recently, the Internal Revenue Service (IRS) released Notice 2021-15 (Notice), which provides employers an opportunity to allow employees to make mid-year changes to employer-sponsored healthcare coverage. The Notice also provides clarifying guidance on previously released special permitted changes to healthcare flexible spending arrangements (FSAs) and dependent care FSAs (DC FSAs) passed under Section 214 of the Taxpayer Certainty and Disaster Relief Act of 2020 (part of the Consolidated Appropriations Act, 2021) and the Coronavirus Aid, Relief, and Economic Security (CARES) Act.

New Relief Overview

  • Prospective Mid-Year Changes to Group Health Plan Elections: Similar to relief that was issued for the 2020 plan year, employers have the option to permit the following prospective changes to group health plan years ending in 2021 (note that any changes are dependent on agreement with plan carriers, stop loss carriers, and/or FSA program vendors/administrators):
    • Employees may enroll in coverage (e.g., if employee initially waived coverage)
    • Employees may change an existing election (e.g., switch plans or change from self-only to family coverage)
    • Employees may revoke coverage, provided the employee attests in writing that they are currently enrolled in, or will immediately enroll in, other coverage
  • Relief for HSA Eligibility: In addition, the Notice provided further guidance around the interaction between flexible spending arrangements (FSAs) and health savings accounts (HSAs) and allows the following plan changes:
    • Employers may permit employees to drop coverage under a health FSA to permit HSA eligibility (as long as the plan is structured so no reimbursements are available following the revocation)
    • Employers may structure their plans so employees enrolling in an high deductible health plan (HDHP) will be able to have any balances converted to a limited purpose FSA to preserve HSA eligibility (regardless of whether employer offers a grace period or carryover)
    • Employers may allow employees to opt-out of the carryover or grace period (similar to a forfeiture)

Note that the above plan structures have generally been allowed for FSAs with a carryover, though this is new relief also applies to plans with a grace period.

  • Retroactive Amendments for Over the Counter Reimbursements: Finally, the new guidance clarified that employers may retroactively amend their health reimbursement arrangement (HRA), FSA, and/or HSA plan to allow expenses incurred for menstrual care products and over-the-counter drugs to be reimbursable as of January 1, 2020.

Additional Guidance on Special Changes to FSAs and DC FSAs: Notice 2021-15 also provides guidance on Section 214, which allowed employers to temporarily adopt a higher carryover provision or an extended grace period, a post-termination grace period for health FSAs, and an age limit increase for DC FSAs. The IRS addressed some lingering issues coming out of their previous guidance including, but not limited to:

  • Employers’ ability to set parameters around permitted changes
  • How employers can structure plans to preserve HSA eligibility for individuals
  • How adopting the increased carryover or extended grace period impacts HSA eligibility, nondiscrimination testing, COBRA continuation coverage election notices, and W-2 reporting
  • Employers’ ability to retroactively amend plan documents

Below, we outline these options in further detail and discuss what employers should consider when implementing changes.

Prospective Mid-Year Changes

Generally, elections for qualified benefits under a Section 125 Cafeteria plan must be irrevocable and must be made prior to the first day of the plan year, except pursuant to a HIPAA special enrollment or a permitted Section 125 status change event. For plan years ending in 2021, Section 214 and Notice 2021-15 permits employers to allow employees to make prospective mid-year changes to healthcare coverage, health FSA elections, and DC FSA elections, regardless of whether employees experience a permitted status change event. Employers are free to determine to what extent changes are permitted and may want to set parameters on allowable changes.

Employer-Sponsored Health Care Coverage

As outlined above, employers can allow certain prospective group health plan changes for plan years ending in 2021. For employers who allow employees to revoke coverage, it is important to note that employers will be required to collect attestation forms from employees that state they are already enrolled in or will enroll in other coverage.

The IRS provides the following example of an acceptable written attestation:

Name: __________________________ (and other identifying information requested by the employer for administrative purposes).

I attest that I am enrolled in, or immediately will enroll in, one of the following types of coverage: (1) employer-sponsored health coverage through the employer of my spouse or parent; (2) individual health insurance coverage enrolled in through the Health Insurance Marketplace (also known as the Health Insurance Exchange); (3) Medicaid; (4) Medicare; (5) TRICARE; (6) Civilian Health and Medical Program of the Department of Veterans Affairs (CHAMPVA); or (7) other coverage that provides comprehensive health benefits (for example, health insurance purchased directly from an insurance company or health insurance provided through a student health plan).

Signature: __________________________

Election Changes to Health FSAs and DC FSAs

For plan years ending in 2021, employers can allow plan participants to prospectively make an initial election, modify an existing election, or revoke their health FSA and/or DC FSA elections, irrespective of whether the employee experiences a status change event. Although salary reductions may be applied only prospectively, employers may allow amounts available under the health FSA and/or DC FSA after the revised election to expenses incurred on or after January 1, 2021, through the end of the plan year. For example, if an employee makes an initial election to enroll in a health FSA in April 2021, the employer could allow that employee to reimburse eligible claims incurred in January 2021 from the health FSA.

If an employee revokes their election, the amounts already contributed through pre-tax salary deductions are subject to the terms of the plan (which must apply uniformly to all plan participants). The plan may provide these amounts are treated the following ways:

  • The amounts will remain available for reimbursement for claims incurred for the rest of the plan year;
  • The amounts will remain available for reimbursement only for claims incurred prior to the revocation;
  • The amounts will not be available for reimbursement, regardless of when the expense is incurred (i.e., the amounts will be forfeited).

If the employer takes the second or third approaches listed above, the plan could provide the revocation terminates participation in the health FSA and the employee could become HSA-eligible following the revocation (assuming they meet the other requirements of eligibility, such as coverage under a high deductible health plan).

Example: During the 2021 regular enrollment period, Employee elects $1,200 toward their health FSA. The plan allows employees to revoke or change elections by March 1, 2021. Employee revokes their election on March 1, 2021, at which time Employee contributed $200 to the health FSA. Under the terms of the plan, Employee can apply the $200 towards eligible expenses incurred until the end of the 2021 plan year. Employee will not be eligible to contribute to an HSA for the rest of the 2021 plan year unless the plan allows Employee to opt-out of the extended claims period and forfeit the remaining funds.

It is important to note that the relief does not allow employers to pay unused amounts to an employee in cash.

Employer Options/Considerations for Mid-Year Election Changes

Employers can determine the extent to which election changes are permitted, provided that any change is made on a prospective basis. Employers may want to set parameters around when and what types of changes are permitted to mitigate against administrative burdens (e.g., updating payroll deductions, coordinating with carriers/plan vendors) that may result from employees changing plan options, for instance employers may:

  • Limit when mid-year changes will be permitted: Employers should specify certain dates during the year when changes are permitted. For instance, employers can allow mid-year changes without a status change up to a certain date (e.g., no status change required for changes made before March 31, 2021).
  • Limit the number election changes that can be made that are not associated with a status change.
  • Limit types of changes: To prevent potential adverse selection of health coverage, employers can limit elections to circumstances in which employee’s coverage will be “better” as a result of the new election (e.g., only permit employees to switch from self-only to family coverage; only permit employees to switch from a plan only covering in-network expenses to a plan that covers both in- and out-of-network expenses).
  • Limit election salary reductions to amounts already reimbursed (for FSA and DC FSA): Employers have the option of limiting election changes to amounts already reimbursed so that employers can avoid potential losses from overspent FSA accounts.

Health FSA and DC FSAs: Carryovers and Grace Period

For health FSAs and DC FSAs with plan years ending in 2020 and 2021, Section 214 allows employers to implement a carryover of all or part of any unused amount remaining at the end of the plan year or they may allow a grace period of up to 12 months, but not both. Section 214 also permits health FSAs to implement a grace period for individuals who terminated participation due to a termination of employment, change in employment status, or a new election. We review the Section 214 changes in our prior blog.

Employer Considerations

Carryover Impact on Subsequent Plan Years: The IRS Notice clarified that amounts carried over do not impact the maximum election limit for subsequent plan years. Further, amounts can be carried over multiple plan years (e.g., if an employee has a remaining balance at the end of the 2020 plan year and those amounts still remain after the end of the 2021 plan year, the employee can access those amounts during the 2022 plan year if the employer adopts carryover relief for the 2021 plan year).

Carryover/Grace Period Impact on HSA Eligibility: Individuals are ineligible from making or receiving HSA contributions during the entire plan year if they have carried over amounts from a health FSA from the prior year. Similarly, individuals are not HSA eligible until the first calendar month after a health FSA grace period ends. This means that employers who adopt the carryover provision, extended grace period, or post-termination grace period may cause individuals to lose HSA eligibility for a period of time. To preserve HSA eligibility, Notice 2021-15 provides employers with the following options:

  • Employee Opt-Out: Employers can amend their plans to allow employees, on an employee-by-employee basis, to opt out of a grace period for plan years ending in 2021 and 2022. Similarly, employers can amend their plans to allow employees, on an employee-by-employee basis, to elect to decline or waive the grace period for the following year (note that prior IRS guidance already permitted this opt-out option for carryovers).
  • Conversion to an HSA-Compatible/Limited Purpose FSA: Individuals will be HSA-eligible if covered under an HSA-compatible plan, such as a limited purpose FSA (LP FSA). To accomplish this, employers can amend their plan documents to:
    • Automatically enroll employees who elect coverage under a HDHP for the following year into a LP FSA (regardless of whether the plan has a grace period or carryover). Any unused amounts remaining in the general-purpose FSA would be carried over to the LP FSA.
    • Provide employees a choice (on an employee-by-employee basis) to switch between a LP FSA and a health FSA for periods where a Section 214 carryover or extended grace period applies. For instance, an employee who begins the year with a general-purpose FSA and then elects coverage under an HDHP can switch to a LP FSA. The employee may add unused funds from the general-purpose FSA to their LP FSA, though the funds can only be used for expenses incurred after the switch and if eligible for reimbursement under the LP FSA.
    • If an employee is covered under a health FSA part of the year and a LP FSA part of the year, any permissible HSA contribution is based on the months the employee is covered under the LP FSA.

Nondiscrimination Testing: Notice 2021-15 provides that amounts carried over or available during a grace period will not be taken into account for purposes of nondiscrimination testing under Section 125 (applicable to Cafeteria Plans) and Section 129 (applicable to DC FSAs).

COBRA Continuation Coverage: Employers are still required to provide a COBRA election notice to qualified beneficiaries after a COBRA qualifying event (e.g., termination of employment, reduction in hours that causes a loss in coverage), even if the employer allows post-termination reimbursements.

Reporting Requirements for DC FSAs: Employers are required to report amounts employees elect in salary reductions for a DC FSA (plus any employer matching contributions) for the year in Box 10 of Form W-2. Notice 2021-15 provides that employers are not required to take into account amounts carried over or amounts that remain available in a grace period when completing Box 10 W-2 reporting. Therefore, the special temporary DC FSA carryover and grace period rules do not affect an employer’s usual W-2 reporting.

Employer Options

Notice 2021-15 provides parameters employers can implement for these changes:

  • Limiting Carryover Amounts & Duration: Employers have the option of limiting the carryover maximums (versus allowing all unused amounts to carryover) and limiting when participants can apply the carryover amounts (e.g., up to a specified date).
  • Limiting Carryovers to Employees who Elect FSA Coverage: Employers may require employees to make an election in the 2021 or 2022 plan year to access the carryover from the prior year.
  • Limiting Grace Period: Employers have the option to choose the length of the grace period (up to 12 months).
  • Limiting Post Termination Reimbursements from Health FSAs: Employers can limit the amounts available for post-termination reimbursement to amounts an employee made in salary reduction contributions before termination. Further, employers do not have to allow reimbursements for the remainder of the plan year, they can adopt a shorter period of time an individual can use remaining funds for reimbursement.
  • Designing the Plan to Preserve HSA Eligibility: Employers can design their health FSA plans to preserve HSA eligibility for employees who enroll in HDHP plans (e.g., permit employees to opt-out of the carryover/grace period, convert health FSA to LP FSA) as outlined above.

Employers should ensure they specify these parameters in the plan amendment and in any communications to employees.

Special Age Limit for DC FSAs

Section 214 allows 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. The Notice clarifies that employers do not need to adopt the increased carryover or extended grace period in order to adopt the special age limit relief (this point was unclear from the original guidance). Further, the Notice provides some helpful examples on how amounts can be applied toward expenses for dependents who “age out.”

Plan Amendments

Employers must adopt a plan amendment to implement the relief provided under Section 214 and Notice 2012-15. Section 214 permits employers to retroactively amend their plan documents to adopt the relief if:

  1. The amendment is adopted no later than the last day of the calendar year following the end of the plan year in which the Section 214 change is effective; and
  2. The plan is operated consistent with the amendment and the employer informs all employees eligible to participate in the plan of the changes to the plan.

Example: An employer wants to change their plan that currently allows for a $550 carryover (from 2020 to 2021) to allow for a carryover of all unused amounts as of December 31, 2020 to the 2021 plan year pursuant to Section 214. The amendment must be adopted by December 31, 2021.

Section 214 did not mention any particular employee notice requirement, whereas this Notice clearly states this this is a requirement for retroactive amendments.

Employer Decision Chart

If employers decide to adopt any permitted relief, they must make the following determinations:

OptionApplies toEmployer Decisions
Prospective Mid-Year Election Changes to Health Care Coverage, FSA elections, and DC FSA electionsFully insured and self-insured healthcare plans, FSAs, LP FSAs, and DC FSAs with plan years ending in 2021– When to allow changes;
– What changes will be permitted (e.g., whether to limit changes to only “better” plans);
– How many changes will be permitted;
– Limitations on changes to FSA/DC FSA elections (e.g., limit to amounts already reimbursed);
– How to collect employee written attestations when revoking coverage (for group health plans, if permitted).
OptionApplies toEmployer Decisions
Increase Carryover AmountsHealth FSAs, DC FSAs, LP FSAs with plan years in 2020 and 2021– The maximum amount plan participants are permitted to carryover into the next plan year;
– How long plan participants can use the carryover amounts;
– Whether to design the plan to preserve HSA eligibility for employees electing HDHP coverage (opt-out provision, converting amounts to a LP FSA).
OptionApplies toEmployer Decisions
Extended Grace PeriodHealth FSAs, LP FSAs, DC FSAs with plan years in 2020 and 2021– The length of the extension (up to 12 months);
– Whether to design the plan to preserve HSA eligibility for employees electing HDHP coverage (opt-out provision, converting amounts to a LP FSA).
OptionApplies toEmployer Decisions
Implement Post-Termination ReimbursementsHealth FSA & LP FSA during calendar year 2020 or 2021 (DC FSA are already permitted to implement post-termination reimbursements)– The amount individuals are permitted to reimburse after participation in the plan ceases (e.g., the remaining balance of the individual’s election or the remaining balance of individual’s salary deductions at the time participation in the plan ceased);
– Whether individuals can opt-out of any grace period provision (to retain HSA eligibility)..
OptionApplies toEmployer Decisions
Special Age Limit for Dependents who Age Out During the PandemicDC FSAs– To which plan year the special age limit will apply;
– How long plan participants will be able to use funds on dependents who are age 13.

Employer Action Items

  1. Determine whether to adopt any of the permissive relief;
  2. Determine which changes will be permitted, when employees can make those changes, and any other boundaries under which changes will be permitted (as outlined above);
  3. Check with your carrier, FSA program vendor, or stop-loss carrier (if self-insured) to ensure any changes will be permitted;
  4. Amend plan documents to adopt changes (employers can retroactively amend plan documents if certain requirements are met, as discussed above);
  5. Communicate changes to employees (and communicate again when changes later expire); and
  6. Collect the required written attestation forms (if employer allows revocation of group health plan coverage).

Additional Resources

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. © 2021 Sequoia Benefits & Insurance Services, LLC. All Rights Reserved

Emerald Law – Emerald is a Client Compliance Consultant for Sequoia, where she works with our clients to optimize and streamline benefits compliance. In her free time, Emerald enjoys stand-up comedy, live music and writing non-fiction.