Flexible Spending Plans in 2021 and 2022

In December 2020, Congress passed the Consolidated Appropriations Act, 2021 (CAA) to curb the economic impacts of the COVID-19 crisis on millions of Americans. As a part of the CAA, temporary changes were made to expand the use of flexible spending accounts (FSAs) in 2021 and 2022. These new measures will allow employers to provide additional supports for employees who may face additional healthcare costs in the coming years.

What’s changed?

Carry Over.  Employers can now allow participants in health FSAs and/or dependent care FSAs to carry over balances from 2020 to 2021 and from 2021 to 2022. This includes plans that would otherwise not permit any carryover.

Grace Periods.  Previously, the grace periods in which individuals could use funds from health FSAs and dependent care FSAs was two and a half months after the end of the plan’s year. Now, for a plan ending in 2020 or 2021 that grace period extends to twelve months past the end of the plan’s year.  This grace period could allow employees extended access to funds that were available in 2020 or 2021 but cannot be coupled with carrying over of unused funds. For instance, an employee cannot access funds from 2020 for twelve months and then use the carryover of balances to extend this access to 2022.

Changes to FSA.  Employers are now able to allow changes to employee health FSA and/or dependent care FSA contributions without “election-change events”, including birth, adoption, change in marital status, etc. Employees may modify their contributions for many reasons, but employers can limit permitted election changes to ensure employees are supported but avoiding overspending on these accounts.

FSA use After Termination.  Previously, the only access an employee could have to their FSA after termination was through making additional contributions under COBRA. Temporarily, the CAA dictates that employees who participated in an FSA in 2020 or 2021 and left or were terminated can access the existing funds without any additional contributions. This ruling also allows former-employees to take advantage of any employer-selected grace periods or carryover of funds from one year to the next.

Extension of Dependent Care.  Through the end of 2021 employers can allow reimbursement on dependent care FSAs to be used for children until their fourteenth birthday. This ruling has been extended from the previous limit of children under thirteen. There is some talk of extending this past 2021 but new legislation surrounding dependent care FSAs has not yet been released.

Employers that wish to adopt any or all of these temporary relief measures for their employees may retroactively amend their healthcare plans to reflect these changes this year. Any changes must be adopted by the last day of the first calendar year after the plan year. This would mean any employer planning to adopt these changes for the 2020 plan year would need to amend by the last day of the 2021 plan year. Experts say in addition to ensuring your plans and policies are in line, it is important to keep an eye on legislation. Current legislation is quickly changing and adapting to the needs of American workers, particularly in the face of COVID-19. Keep up to date on all local, state, and federal legislation surrounding FSAs and other forms of healthcare support.

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