COVID-19 relief bill update
On February 18, 2021, the IRS released additional guidance to provide relief for COVID-19 under 125 Cafeteria Plans. It clarifies provisions for health care and dependent care flexible spending accounts (FSAs) under the Consolidated Appropriations Act
Date Posted: March 11, 2021
On February 18, 2021, the IRS released Notice 2021-15 to provide additional relief for COVID-19 under 125 Cafeteria Plans. This notice provides clarity around provisions to provide relief for health care and dependent care flexible spending accounts (FSAs) under the Consolidated Appropriations Act, which was signed into law on December 27, 2020. See this article for a summary of those provisions, which may impact employers and their benefit plans.
Please see below for a summary of the provisions included in each section of IRS Notice 2021-15.
Section A: Carryovers for health care FSA and dependent care FSA
Notice 2020-29 stated that unused funds from plan years ending in 2020 and 2021 may be carried over into the next plan year.
This notice adds that a plan sponsor may design their plan to allow individual participants to opt-out of the carryover, thereby discontinuing potentially disqualifying coverage for health savings account (HSA) eligibility.
Section B: Extended Claims Periods for health care FSA and dependent care FSA and post-termination health care FSA reimbursements
Notice 2020-29 stated that for plans ending in 2020 and 2021, the grace period may be extended up to 12 months after the end of the plan year.
This notice adds that a plan sponsor may design their plan to allow individual participants to opt out of the FSA grace period, thereby discontinuing potentially disqualifying coverage for HSA eligibility.
Section C: Interaction of carryovers and extended periods for incurring claims with spend down
Generally, the carryover and grace period provide the same relief, except that:
- A plan implementing the extended grace period gives employees whose participation has ceased in a prior plan year until the end of the grace period to incur claims using the prior plan year account
- A plan implementing carryover gives employees whose participation has ceased until the end of the plan year to incur claims and their funds would not carryover to the new plan year
- The rules will revert to the standard rules for plan years ending in 2022
Section D: Special age limit relief for dependent care FSA
Notice 2020-29 stated that, for a plan year that had an election period ending on or before January 31, 2020, participants may claim expenses for dependents who turned 13 during the applicable plan year and any extension to that plan year.
This notice adds that, for a limited number of plans and plan participants, the age limit relief replaces age 13 for age 14.
- Only applicable claims incurred during a plan year where the election period ended on or before January 31, 2020 (“Original Plan Year”), or in the immediately following plan year, but only with regard to the funds remaining in the account at the end of the Original Plan Year, not any new elections for a plan year with an election period ending on or after February 1, 2020.
- The relief only applies with regard to dependents who obtain age 13 in the original plan year or the immediately following plan year.
Section E: Elections under a 125 Cafeteria Plan
Notice 2020-29 stated that plans ending in 2021 may allow health care FSA or dependent care FSA election amount changes for any reason.
This notice extends the guidance with regard to permissive election changes.
- A plan sponsor may also amend their plan to permit changes to employer-sponsored health coverage for any reason for plan years ending in 2021.
- A plan sponsor may offer a limited period to change elections.
- If there is election change flexibility, then participants would be eligible to revoke their general purpose FSA (GPFSA) election and elect a limited purpose FSA (LPFSA).
Section F: Changes between HSA-compatible and general purpose health care FSAs and HSA contributions
This notice includes a section explaining rules on HSA eligibility and moving between a GPFSA and a LPFSA.
- An employee enrolled in an LPFSA and qualifying high-deductible health plan (HDHP) who revokes their LPFSA election and elects GPFSA, or vice versa, is only eligible to contribute to the HSA for the months he or she was in the LPFSA.
- Single combined annual limit for both the LPFSA and GPFSA is $2,750.
Section G: Interaction with COBRA
This notice adds that plans with the spend-down provision for the health care FSA must still provide a COBRA notice to a participant with a qualifying event.
- A plan sponsor must still send a COBRA notice to a participant who is allowed to spend down their FSA balance if a COBRA notice would otherwise be required.
Section H: Plan amendments
This notice adds that plan amendments may be retroactive so long as the plan has been operating in accordance with the amendment AND the amendment is adopted no later than the last day of the first calendar year beginning after the end of the plan year in which the relief is effective.
- For example, if an employer sponsors a calendar year 125 Cafeteria Plan with a health care FSA that provides for a $550 carryover (from 2020 to 2021) and amends the plan to carry over the entire unused amount remaining in employees’ health care FSAs as of December 31, 2020, to the 2021 plan year, the amendment must be adopted by December 31, 2021.
- An amendment for the 2020 plan year of a non-calendar year plan, however, must be adopted by December 31, 2022.
Section I: Reporting requirements for dependent care FSA
An employer can report amounts withheld from payroll for dependent care FSA in the year in which the amounts were withheld on Box 10 of the W2, rather than the amount spent on dependent care FSA claims in a year.
- Employees may have to report amounts spent above $5,000 in any year as taxable income on their tax return.
Please contact your Relationship Manager or Optum Bank client services if you have any questions about adopting the temporary provisions included in the COVID-19 relief bill. We advise you to speak with your tax or benefits counsel regarding interpretation of the legislation.