This week the IRS issued a new Notice 2021-15 intended to clarify the application of special optional relief for flexible spending accounts (FSAs) enacted at the end of 2020. The Notice also adds temporary flexibility with respect to employer-sponsored health coverage, allowing a cafeteria plan to now permit employees to make certain prospective mid-year health coverage election changes during calendar year 2021, regardless of whether they satisfy existing mid-year election change rules. This is very similar to the optional amendment for mid-year health coverage election changes that was permissible in 2020.
The FSA relief provisions enacted at the end of 2020 included the following major health FSA (HFSA) and dependent care FSA (DCFSA) relief that employers can choose to offer in 2021 and 2022 to address circumstances caused by the COVID-19 pandemic. See our update for a complete summary of these temporary optional rules.
Flexibility for the carryover of unused amounts for both HFSAs and the DCFSAs of the full unused balance from plan years ending in 2020 and 2021 into the subsequent plan years ending in 2021 and 2022, respectively.
Flexibility to extend a 12-month grace period for both HFSAs and the DCFSAs after the plan years ending in 2020 and 2021.
Flexibility to adopt a special rule regarding post-termination reimbursements from HFSAs (similar to the spend down option available under a DCFSA) permitting employees who terminate participation mid-year during calendar year 2020 or 2021 to continue to incur reimbursable claims for the remainder of the plan year in which participation ceased.
Flexibility for a special claims period and carryover rule for a DCFSA for employees whose children reached age 13 during the pandemic.
Flexibility to allow certain mid-year election changes for HFSAs and DCFSAs for plan years ending in 2021.
New IRS Notice The new guidance provides more details and clarifying examples regarding the above rules.
Mid-Year Health Coverage Changes Most significantly, the new Notice adds temporary flexibility with respect to employer-sponsored health coverage, allowing a cafeteria plan to now permit employees to make certain prospective mid-year election changes during plan years ending in 2021, regardless of whether they satisfy existing mid-year election change rules. This is very similar to the optional amendment for mid-year health coverage election changes that was permissible in 2020 under Notice 2020-29 (see our prior update). Specifically, for employer-sponsored health coverage, a cafeteria plan may now permit employees to prospectively take any of the following actions for plan years ending in 2021:
Make a new election to enroll mid-year in medical, dental, or vision coverage if the employee previously waived coverage;
Revoke an existing election for medical, dental, or vision coverage and make a new election to enroll in different coverage sponsored by the same employer, or move from single to family coverage; or
Revoke an existing election for medical, dental, or vision coverage, provided the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer (template language provided). An employee requesting to drop medical coverage may not revoke the election by attesting to enrollment in coverage solely for dental or vision benefits.
Employers must ensure that insurers (including stop-loss providers) will accept employees’ mid-year enrollment without experiencing a permitted election change event for this new election opportunity to be made available.
Mid-Year Election Change Limits
Employers are permitted to limit mid-year election changes (e.g., only until April 30, 2021) or to limit the number of election changes during that plan year (e.g., employees can only make one election change without experiencing a permitted election change event).
Employers are permitted to limit mid-year election changes to certain types (e.g., only allow decreases or higher cost to lower cost option) or not allow new enrollments for employees who previously waived coverage (unless otherwise permitted or required under the normal rules), or limit a mid-year HFSA election revocation or decrease to amounts no less than amounts already reimbursed to the employee by the HFSA in the plan year (to avoid potential experience losses from overspent accounts).
For employees who enroll in a HFSA or DCFSA mid-year, an employer may allow amounts contributed after the election change to be used for eligible expenses incurred at any point during the plan year, even those incurred before the date of the election change.
With respect to elections to terminate participation in a HFSA or DCFSA, an employer may allow amounts contributed before the effective date of the termination to reimburse eligible expenses incurred after the termination date through the end of the plan year, or alternatively, the plan may limit reimbursement to only eligible expenses incurred before the termination date (which may be helpful if a participant terminates participation in a health FSA in order to become HSA eligible).
A plan is never permitted to pay out unused HFSA or DCFSA amounts in cash (must have proper substantiation of qualified reimbursable expenses).
Carryover and Grace Period Clarifications
Employers have flexibility with the design and could, for example, limit the amount of the carryover, or offer a grace period of less than 12 months, and/or the employer could also limit the ability to carryover unused amounts to those who elect to contribute toward the next plan year.
Unused amounts from a plan year ending in 2020 that are not used during 2021 could be made available into the 2022 plan year. Note too that the carryover or grace period is allowed for limited-purpose, post-deductible, and general-purpose HFSAs.
The carryover or grace period may be offered regardless of whether the plan is currently designed to offer a carryover, grace period, or neither one (e.g., a HFSA with a current carryover could be amended to instead offer an extended grace period, and a DCFSA with a current 2 -½ month grace period could be amended to instead offer a carryover).
Both options offer participants the ability to use the prior year’s unused balance into the next plan year, but note that a carryover is generally only available to those who are still participating in the subsequent plan year, while a grace period unused balance could sometimes be available to those who are no longer participants.
Employers adopting the full carryover provision or the extended 12-month grace period must amend the cafeteria plan to reflect the change by the end of the first new calendar year into which amounts carry over or are available during the grace period.
Amounts carried over into subsequent plan years under the HFSA and DCFSA do not affect the employee’s election limit for the subsequent plan year. So employees can elect up to the full $2,750 limit under the HFSA or $5,000 limit under the DCFSA for the 2021 plan year even if they are carrying over amounts from the 2020 plan year. Employers are also not required to adjust the DCFSA amount reported in Box 10 of a W-2 to take into account amounts that remain available in a grace period (including amounts available due to an extended grace period or increased carryover).
Amounts available via a carryover or extended grace period are disregarded in determining the COBRA premium for a HFSA, and can be ignored for purposes of cafeteria plan and DCFSA discrimination testing.
HSA Eligibility
Employers may design a HFSA to provide that employees enrolling in a high deductible health plan (HDHP) option for a subsequent plan year will automatically have their carryover (or grace period) balance converted to a limited purpose FSA to preserve HSA eligibility, or the employee may opt out of the carryover to preserve HSA eligibility (i.e., participants cannot be given a choice between a limited-purpose or general-purpose grace period).
Where the HFSA is structured not to permit reimbursement of expenses incurred on or after the effective date of the employee’s election to revoke the HFSA, employees will not have disqualifying coverage that blocks their HSA eligibility for months after the effective date of the HFSA election revocation.
HFSA Spend Down
Employers may allow employees who ceased participation in a HFSA during the 2020 or 2021 calendar year to continue to receive reimbursements from unused benefits or contributions through the end of the plan year in which participation ceased (including any grace period).
Employers may limit the amount available to terminated HFSA participants in the spend down period to only the amount contributed to the health FSA prior to termination (i.e., a plan can provide that terminated employees are able to incur reimbursable claims through the remainder of the plan year only up to the amount of their pre-termination contributions).
Terminated employees with an underspent account wishing to access their full HFSA election balance post-termination must be able to continue HFSA coverage through COBRA.
DCFSA Age Limit
Where the DCFSA age limit provision is adopted, it only applies to employees who enrolled in the DCFSA for the last plan year with respect to which the end of the regular enrollment period for the plan year was January 31, 2020 (2020 year for a calendar plan year).
Such employees must have a child who attained age 13 either during that plan year, or in the subsequent plan year for amounts that remained unused during that plan year (i.e., any balance remaining at the end of the 2020 plan year may be used to reimburse qualifying expenses for the 13-year-old until the child turns 14).
Amounts available in the subsequent year are separate from the expanded carryover and grace period rules that otherwise apply, so neither of those provisions need to be adopted to make the amounts available in the subsequent plan year under this special age 14 provision.
Next Steps
Employers must decide which, if any, of these flexibility options to adopt (none are required).
Employers should consider the administrative challenges related to the relief and coordinate with their third party administration vendors to confirm their readiness and if any additional fees will apply. There may be delays while administration platforms are updated to accommodate changes and vendors may impose additional fees to administer the flexibility.
Employers should distribute clear communication about any plan flexibility adopted so that plan participants understand exactly what, if any, additional flexibility is included in their plan.
Employers can expect some participant confusion on these issues as some employers will adopt these enhanced flexibility provisions and others will not.
Employer required amendments can be made retroactively, provided the amendment is adopted not later than the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective and the plan is operated consistent with the terms of such amendment for the full retroactive period.
Conner Strong & Buckelew is prepared to assist plan sponsors in determining how plans may be configured to enable the above described changes should employers choose to implement them. Please contact your Conner Strong & Buckelew account representative toll-free at 1-877-861-3220 with any questions. For a complete list of Legislative Updates issued by Conner Strong & Buckelew, visit our online Resource Center.
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