Employees with flexible spending arrangements, or FSA, for health care or dependent care expenses now have a more flexibility to use these benefits.
As you know, employers can offer employees FSAs to use throughout a plan year either for medical expenses or for dependent care expenses. Most FSAs contain a “use it or lose it” component, in which the amounts contributed by the employee throughout the year and not used by the end of the year will revert to the employer to be evenly distributed among all employees or used to defray the administrative costs of providing the benefits. Some plans would allow a limited grace period of 2 1/2 months (usually by March 15 the following year) for employees to submit expenses from the previous year for reimbursement. Other plans would allow a portion of remaining contributed funds (generally no more than $550) to be carried over to the next plan year.
The Covid-19 pandemic has forced many schools and childcare centers to close. Hospitals and physicians’ offices also reduced their services. As a result, many employees were not able to use all the funds contributed to FSA accounts.
The IRS ruled last year that employers may amend their Section 125 cafeteria plans and FSAs to allow for mid-year election changes during 2020 without a qualifying change in status as well as extending the grace period beyond the March 15 deadline for reimbursements.
The IRS recently updated its guidance on this matter to account for the ongoing conditions surrounding Covid-19 restrictions, including the option of allowing an extended grace period or carryover option for employees.
Here is a snapshot of some of the most recent guidance:
- Midyear election changes for FSAs and Section 125 cafeteria plans can be made to 2021 plans.
- The grace period limitation of 2 ½ months after the end of the plan year (which is generally March 15) for FSAs has been extended to 12 months for FSA plan years ending in 2020 or 2021. If a plan adopts a grace period, 2020 balances can be used through the 2022 plan year.
- FSA plans can permit unused amounts from 2020 or 2021 plans to be carried over into the next plan year. The carryovers are not allowed after the 2022 plan year.
- Carryovers have generally been capped at $550 of unused funds, but under the new guidance, carryovers are unlimited.
- A plan can only adopt a grace period or allow carryovers, but not both.
- Employees who terminated their employment midway through the year while covered under a health FSA during 2020 or 2021 can continue to participate and incur claims for reimbursement through the end of the plan year in which participating ceases.
If you offer a Section 125 cafeteria plan or FSA for either health care or dependent care for your employees and want to take advantage of this increased flexibility, you must amend your plans by the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective. In other words, if you sponsor a calendar year cafeteria plan with a health FSA that provides for a $550 carryover from 2020 to 2021 and you want to amend the plan to carry over the entire unused amount remaining in your employees’ health FSAs as of December 31, 2020, to the 2021 plan year, you must adopt the amendment by December 31, 2021. Likewise, if you want to amend your 2021 plans, these plan documents must be updated by December 31, 2022.
Your employee benefits representative can help you with any plan amendment. In the meantime, please feel free to contact us with any questions you may have.
Kristy Gailey is a Manager with our Business & Tax Advisory Group. She can be reached at kgailey@antarescpas.com. Pat Herrera, EA, is a Specialist with our Business & Tax Advisory Group. She can be reached at pherrera@antarescpas.com.
