The COVID-Related Tax Relief Act of 2020 and the Taxpayer Certainty and Disaster Tax Relief Act of 2020 — both part of the Consolidated Appropriations Act of 2021 (collectively “the Act”) — contain numerous provisions related to employer-sponsored benefit plans. Below are some of the key provisions relating to welfare plans, retirement plans and other employer-provided benefits.
Section 125 flexible spending account relief
The Act provides for a number of temporary changes to the rules for Section 125 plan health flexible spending accounts (HFSAs) and dependent care flexible spending accounts (DCFSAs) — referred to collectively as FSAs. The Act codifies and expands the rules enacted in IRS Notice 2020-29 for 2020 and extends them into 2021. We expect the IRS to release further guidance in the coming weeks about the changes outlined below.
FSA carryovers from 2020 and 2021: Employers were hoping for relief from Congress that would allow them to refund unused FSA balances from the 2020 plan year. Unfortunately, the Act provides no such relief. However, employers are permitted to allow employees to carry over any unused benefits or contributions remaining in FSAs from 2020 to 2021 and from 2021 to 2022. If adopted, this relief overrides the existing $550 carryover limit applicable to HFSAs and enables carryovers for DCFSAs for the first time. This relief is available for both calendar and non-calendar year FSAs.
There is no relief allowing an HFSA carryover or grace period (including the extended grace period relief described below) in a general-purpose HFSA from interfering with HSA eligibility for an account holder, due to having impermissible coverage that provides medical benefits prior to meeting the deductible. Our interpretation is that the Act permits unlimited carryovers from a general purpose HFSA to a limited purpose or other HSA-compatible HFSA, which avoids the HSA conflict for the following plan year.
Extended grace periods: Plan sponsors are permitted to extend the grace period for a plan year ending in 2020 or 2021 to 12 months after the end of the applicable plan year. The grace period extends to unused benefits or contributions remaining in the FSAs. In previous guidance, the IRS clarified that plans may not offer both a carryover feature and the grace period. It is our view that the unlimited carryover seems administratively preferable to the extended grace period due to not having to track the remaining unused FSA balance from the prior year and the fact that it provides more flexibility to mitigate the chance that HSA eligibility is disqualified.
FSA benefits to terminated participants: Employers may allow employees who terminate employment in 2020 or 2021 to receive reimbursement for qualifying medical expenses incurred through the end of the plan year without a COBRA election, up to their remaining HFSA balance. This relief permits reimbursements for expenses incurred after termination, providing further relief. Note that the HFSA uniform coverage rule does not apply, as reimbursements are limited to a participant’s remaining unused balance without risk of loss to the employer.
Age limit increased to 14 from 13 for DCFSA: The Act contains a special carryforward rule for DCFSAs to increase the maximum age by one year from 13 to 14 if the dependent reached age 13 during the 2020 plan year. From a practical standpoint, there are a lot of unanswered questions how this will be administered. For example, DCFSAs have a statutory limit of $5,000, and practitioners do not have guidance whether the carryover counts toward the statutory limit or if it can be exceeded. In addition, clarity is needed around whether the new law requires bifurcated tracking for amounts related to the carryover versus the new DCFSA election made for the next plan year, since the increased age limit only applies to the unused balance, not the new election.
FSA election changes allowed mid-year without qualifying event: Employers are permitted to allow participants to change elections for the FSAs in plan years ending in 2021 without a qualified status change event. It is our understanding that the Act allows employers to limit the situations in which participants can increase or decrease elections, similar to the guidance provided under the CARES Act.
Amendment deadline: The Act permits amendments to be effective retroactive to the first day of the plan year if adopted by the end of the following plan year. For example, if a plan sponsor wishes to implement the unlimited carryover in its calendar year plan from 2020 to 2021, the amendment must be adopted no later than December 31, 2021. The plan must be administered consistently with the amendment from its intended effective date through its later adoption date.
Retirement plan provisions
The Act provides for retirement plan disaster relief for distributions, loans and recontributions that had been made part of the tax code previously in response to other disasters. Under this version of disaster relief, "qualified disasters" include those occurring from after December 28, 2019, that are declared disasters by the President. Individuals who reside in a disaster area may take plan distributions up to $100,000 without being subject to the 10% penalty on premature distributions and may repay the amount distributed during a three-year period.
In addition, loans from qualified plans are increased from $50,000 to $100,000 for individuals who reside in a disaster area. For new and outstanding retirement plan loans, the repayment period is also extended by one year.
Relief is also provided for employers from the partial plan termination rules of Internal Revenue Code Section 411(d)(3), which requires full vesting of affected employee accounts if a partial plan termination occurs. Normally, a partial termination has occurred when more than 20% of a plan’s participants are involuntarily terminated during the year. An affected employee is generally anyone whose employment is terminated for any reason during the plan year in which the partial termination occurs and who had an account balance or accrued benefit in the plan at any point during the plan year. Thus, a partial termination is more likely to have been incurred during 2020 with economic events not within the employer’s control. The IRS previously issued guidance under the CARES Act that employees furloughed or laid off due to COVID-19 but rehired by the end of 2020 would not be counted in determining whether a plan incurred a partial plan termination.
The Act provides that a plan won't be treated as having a partial termination during any plan year that includes the period beginning on March 13, 2020, and ending on March 31, 2021, if the number of active participants covered by the plan on March 31, 2021, is at least 80% of the number of active participants covered by the plan on March 13, 2020. This is good news for employers who terminated more than 20% of their workforce during the COVID-19 pandemic but whose businesses rebounded enough to enable them to bring back a significant number of employees by March 31, 2021.
Surprise medical bills
Congress enacted legislation designed to provide greater cost transparency regarding billing practices and disclosure regarding billing protections to improve employee health care plan outcomes. This section of the Act is over 150 pages long and is effective January 1, 2022. Group health plans must implement procedures to prevent surprise medical bills related to out-ofnetwork medical providers when an emergency or other issue forces the use of an out-ofnetworkprovider. We expect significant regulatory guidance to be provided later in 2021.
Student loan repayment assistance extended
The Act extends the prior CARES Act provision that allows employers to make payments of up to $5,250 (including interest) tax free, toward employees' student loans through December 31, 2025. Previously, the CARES Act provided guidance to allow student loan assistance from March 27, 2020, through December 31, 2020. To take advantage of the provision, an employer must adopt a plan compliant with Section 127 of the Internal Revenue Code. The employer may pay the lender directly or reimburse the employee for loan payments made.
Employer credit for paid family and medical extended
Under the Tax Cuts and Jobs Act of 2017, eligible employers could obtain a federal tax credit for paid family and medical leave to their employees. The Act extends the credit through December 31, 2025, and applies it to wages paid in taxable years beginning after December 31, 2020. The credit is equal to 12.5% of eligible wages if the rate of payment is 50% of such wages and is increased by 0.25 percentage points (but not above 25%) for each percentage point that the rate of payment exceeds 50%. The maximum amount of family and medical leave that may be taken into account with respect to any qualifying employee is 12 weeks per tax year.
Deduction for business meals
The Act provides for a temporary allowance of 100% of the cost of certain business meals for expenses incurred after December 31, 2020, and before January 1, 2023. The Act expands Internal Revenue Code Section 274 to allow a full deduction for “food or beverages provided by a restaurant.”
While additional guidance is needed to address questions raised by practitioners, we believe Congress’s intent would allow a full deduction for both in-restaurant meals as well as catered and takeout meals, including internal business meals such as for training and external meals with clients or vendors. Previously, the Tax Cuts and Jobs Act of 2017 significantly limited this deduction to 50% for certain types of business meals. This is welcome relief that should provide a much-needed boost for the restaurant sector and for all businesses.
Your next steps
In summary, the Act continues the recent trend in the SECURE and CARES Acts to provide favorable benefits to both employees and employers of employee benefit programs. Employers should examine these provisions to determine which optional provisions should be implemented for their workforce and gain an understanding of the impact of all new mandatory rules.
If you have any questions about how these provisions impact your business and employees or would like assistance, contact Wipfli. For more information on the Consolidated Appropriations Act, visit our COVID-19 resource center.
Updated employee benefit plan and IRA quick-reference table 2020 & 2021
COVID-19 legislative updates on cafeteria plans, FSAs, HSAs, HRAs and HDHPs
How the CARES Act affects retirement plans