Employers given additional flexibility for FSAs and dependent care assistance programs
Typically, when an employee does not spend all health flexible spending account (FSA) or dependent care account funds within the plan year, those leftover amounts are forfeited. While there may be limited grace periods or certain carryover amounts allowed, at the end of the day, these accounts are “use it or lose it.”
However, the IRS has responded to the unpredictability and hardships of the COVID-19 pandemic by providing greater flexibility to employee benefit plans offering FSAs or dependent care assistance programs. Under the Taxpayer Certainty and Disaster Tax Relief Act of 2020, Notice 2021-15 gives employers the option to amend their plans in 2021 and 2022 to provide greater flexibility for employees to elect and use these programs during the pandemic without risking the forfeiture of the amounts they have set aside.
What does this mean?
Under FSAs and dependent care assistance programs, an employer allows employees to set aside a certain amount of pre-tax wages to pay for medical care and dependent care expenses. Amounts are then reimbursed from the employee’s designated health FSA or dependent care assistance program. The amounts properly spent are not subject to federal income tax.
Because of COVID-19, employees are more likely to have unused FSA amounts or dependent care assistance program amounts at the end of 2020 and 2021. Under Notice 2021-15, employers can now provide flexibility in the following areas:
- To allow the carryover of unused amounts from the 2020 and 2021 plan years
- To extend the permissible period for incurring claims for plan years ending in 2020 and 2021
- To adopt a special rule regarding post-termination reimbursements from health FSAs
- To allow a special claims period and carryover rule for dependent care assistance programs when a dependent "ages out" during the COVID-19 public health emergency
- To allow certain mid-year election changes for health FSAs and dependent care assistance programs for plan years ending in 2021
Prior guidance allowed employers with cafeteria plans through the end of calendar year 2020 to permit employees to apply unused FSA or dependent care assistance program amounts to pay for or reimburse medical care or dependent care expenses. Now, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 provides similar flexibility for these arrangements in 2021 and 2022.
The decision to adjust employee benefit plans to enable this flexibility is at the discretion of the employer that sponsors the plan. The plan amendments can be retroactive and must be made by December 31, 2021.
If you have any questions about Notice 2021-15 and how it could apply to your employee benefit plan, contact Wipfli.
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