COVID-19 Changes 5 FSA Rules For 2020-2021

January 27, 2021

Are you wondering what to tell your employees who have unused funds left in their flexible spending accounts? If you administer the employee benefits at your workplace, you are not alone. Many Flexible Spending Account participants have contributions remaining in their accounts. This is because medical and/or childcare costs decreased due to the COVID-19 Pandemic. The good news is that relief is here for participants. COVID-19 changes 5 Health Flexible Spending Accounts (HFSAs) and Dependent Care Assistance Program (DCAP) rules temporarily for plans ending in years 2020 and 2021. Recent legislation gives employers the option to provide this relief to their employees participating in these plans.

FSA Change #1: Unlimited Carryovers

Participants may have unlimited carryover of their unused funds for their Flexible Spending Accounts from plan year 2020 to the next plan year. Unused funds may also be rolled from plan year 2021 to 2022. In addition, unlimited carryover may be applied to dependent care FSAs (DCAPs).

How This Is Different:

FSA: Typically, there is a dollar maximum that can be rolled over

DCAP: Typically, no rollover is allowed

NOTE: If an employer chooses this option, they can NOT also choose the Grace Period option (see below)

FSA Change #2: Extended Grace Period

FSA and DCAP grace periods may be extended for up to a 12-month grace period total.

How This Is Different:

Typically, the grace period maximum is 2 ½ months

NOTE: If an employer chooses this option, they can NOT also choose the unlimited rollover option (see above)

FSA Change #3: Election Changes

Participants can make election changes for any reason (for plan years ending in 2021). A version of this rule is already in place for plan years ending in 2020. Employers can choose to limit election plan changes for Health FSAs.

How This Is Different:

Normally, once elections have been made for FSAs, participants may only make changes if they have a qualified event.

FSA Change #4: Reimbursements Post-Termination

An FSA participant who has terminated employment with the sponsoring employer in 2021 may continue to be reimbursed for eligible medical expenses through the end of the plan year. This includes any grace period.

How This Is Different:

Typically, participants must elect COBRA and continue making elections to the plan to receive reimbursements.

FSA Change #5: Aged Out Dependents Of Dependent Care FSA (DCAP)

Through the end of the 2021 plan year, reimbursement for qualifying DCAP expenses can be made for children until they turn age 14.

How This Is Different:

Normally, reimbursements are only allowed up to age 13.

FSA Changes Are Voluntary For Employer

Keep in mind that these FSA changes are voluntary for the employer, who may choose whether to offer the new benefits. This gives options for the employer to offer greater flexibility to employees participating in the plan. If adopted, the employer must offer the new benefits to all eligible employees and they must amend their plan by December 31, 2021.

Considerations For Employers

It is important to consider how changes to the employer sponsored FSA plan will impact the administrative burden for the organization. Some things to consider are:

Will the employer offer 100% unlimited carryover? This means the employer must calculate maximum carryover amounts for each employee. Or should the employer set one lower carryover amount for all employees?
When and how often would the employer allow for election changes, during open enrollment only, at the time of FSA changes, or anytime?
How would changes to the grace period or carryover impact employee’s Health Savings Accounts (HSA), if offered?
If unlimited carryover amounts are allowed, how will this affect determination of which dollars are spent when applying FSA ordering rules? If the employer tracks this, do they have capacity to do so?
Will the employer add back dependents who aged off the plan during the plan year?
Will the employer allow for terminated employees to use FSA funds through the end of the plan year, even if they don’t elect COBRA?

Contact Your FSA Administrator

We recommend that you contact your FSA administrator for specific guidelines they have for these rule changes. Each FSA Administrator may apply these rule changes differently. Employers who currently offer FSAs should carefully review their plan documents and look for any communications from their carrier. These rule changes are temporary and only apply to FSAs with plan years ending in 2020 and 2021. You must complete plan amendments and Summary of Material Modifications if the employer will adopt these changes. You also must communicate plan changes to employees. Plan years ending in 2020 and 2021 must be amended by December 31, 2021.

This article is not to be considered legal advice. Legal consultation and ERISA counsel are recommended prior to amending the employer plan(s).

Please contact us at 888-427-5222 for further questions. If you would like to request a complimentary consultation, you may do so HERE.

‍