More Flexibility For Flexible Spending Accounts

May 14, 2021 | CPA Blog |

Due to the pandemic, the IRS has provided greater flexibility to employee benefit plans offering health flexible spending arrangements (FSAs) or dependent care assistance programs.

Under the COVID-related Consolidated Appropriations Act (CAA) and the American Rescue Plan Act (ARPA), these FSA plans now have additional discretion in 2021 and 2022 to adjust their programs to help employees better meet the unanticipated consequences of the public health emergency.

In Notice 2021-15, the IRS responded to unanticipated changes in the availability of certain medical care and dependent care. They recognize that as a result of COVID-19, participating employees are more likely to have unused health FSA amounts or dependent care assistance program amounts at the end of 2020 and 2021.

Notice 2021-15 provides flexibility for employers in the following areas related to health FSAs and dependent care assistance programs:

  • Provides flexibility for the carryover of unused amounts from the 2020 and 2021 plan years
  • Provides flexibility to extend the permissible period for incurring claims for plan years ending in 2020 and 2021
  • Provides flexibility to adopt a special rule regarding post-termination reimbursements from health FSAs
  • Provides flexibility for a special claims period and carryover rule for dependent care assistance programs when a dependent “ages out” during the COVID-19 public health emergency
  • Allows certain mid-year election changes for health FSAs and dependent care assistance programs for plan years ending in 2021

Due to the fact that millions of employees have access to health FSAs and dependent care assistance programs sponsored by employers under cafeteria plans, these changes are important to address with the plan provider. The decision to adjust these employee benefit programs is at the discretion of the employer that sponsors the plan.

Normally the account funds that are not spent by the employee within the plan year, subject to limited grace periods or certain carryover amounts, are forfeited. However, Notice 2021-15 offers employers the option to amend their plans 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.