Bradley Arant Boult Cummings LLP
  January 8, 2021 - United States of America

New Temporary Special Rules for Flexible Spending Accounts

The president has signed into law the Taxpayer Certainty and Disaster Tax Relief Act of 2020, which includes several temporary special rules aimed at minimizing forfeitures and increasing the utility of health and dependent care flexible spending accounts (FSAs). Plans providing for one or both accounts can take advantage of these participant-friendly rules immediately.

The act permits plan sponsors to implement the following voluntary changes for health and/or dependent care FSAs:

  • Unlimited Carryovers. All unused amounts in a health or dependent care FSA may be carried over from the 2020 plan year to the 2021 plan year and from the 2021 plan year to the 2022 plan year. This rule applies to dependent care FSAs even though carryovers are otherwise not permitted for these accounts.
  • Extended Grace Period. The grace period for a health FSA or dependent care FSA for a plan year ending in 2020 or 2021 may be extended from 2½ months to 12 months.
  • Election Changes. For plan years ending in 2021, participants may prospectively modify their health FSA or dependent care FSA contributions for any reason. A similar rule is already in place for plan years ending in 2020. Plan sponsors may, however, wish to limit permitted election changes for health FSAs to avoid overspending in the accounts.
  • Post-Termination Reimbursements from Health FSAs. An employee who ceases participating in a health FSA during 2020 or 2021 may continue to receive reimbursements from unused amounts through the end of the plan year in which the employee ceased to participate, including any grace period. Unlike reimbursements available to participants who have elected COBRA coverage following their termination, this rule does not require that the participants make further contributions to access their unspent funds.
  • Carry Forward for Aged-Out Dependents in Dependent Care FSA. The maximum age of a dependent for dependent care FSAs may be extended from 12 to 13 for eligible dependents who aged out of eligibility during the last plan year with a regular enrollment period ending on or before January 31, 2020. Additionally, employees with unused balances for such plan year due to the application of this rule may receive reimbursements of the unused balance in the following plan year.

Plans adopting any of these voluntary changes must be amended by the end of the first calendar year beginning after the end of the plan year in which a change took effect and must be operated in accordance with the amendment’s terms beginning on its effective date. Thus, calendar year plans adopting these voluntary changes will generally need to be amended by December 31, 2021.

If you have any questions about the changes to health and dependent care FSAs in the act, please contact one of the attorneys in the Employee Benefits and Executive Compensation Practice Group at Bradley.

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