The Internal Revenue Service (IRS) recently issued Notice 2021-15, creating new COVID-19 relief options for employer-sponsored Section 125 plans. It implements the health and dependent care flexible spending arrangement (FSA) relief provisions of the Consolidated Appropriations Act of 2021 (CAA) and offers clarifications about how that relief will work on a practical level. The notice also gives employers the option to allow mid-year health plan elections during 2021 without a qualifying event. Finally, it offers plan amendment timing relief for sponsors of Health FSA plans and health reimbursement arrangements (HRAs) that opt to reimburse employees for newly qualified expenses authorized by the Coronavirus Aid, Relief, and Economic Security Act (CARES Act).
Health FSA and DCAP Relief
The CAA gives all employers that sponsor Health FSAs (including HSA-compatible FSAs) and dependent care assistance programs (DCAPs) the option of allowing employees to carry over unused funds to the next plan year. It also provides plan sponsors with the possibility of extending a spending grace period for up to 12 months for plan years ending in 2020 or 2021. Plan sponsors may also allow prospective Health FSA and DCAP election changes during this period without a corresponding status change. Another thing the new law permits is raising the age limit for qualified dependent care beneficiaries to under age 14, rather than under age 13, for both the 2020 plan year and for any unused funds that might be “carried over” or subject to an extended grace period. This option is only available if the regular enrollment period was before January 31, 2020. Other relief in the CAA includes a special rule regarding post-termination reimbursements from health FSAs during plan years 2020 and 2021.
This relief was welcome news for employers and employees alike since the global pandemic has changed medical care and child care needs for many. However, it’s also led to some questions for plan administrators. Notice 2021-15 provides many answers to those questions. It also clarifies that employers have great flexibility if they choose to make newly allowable changes to their Health FSA and DCAP plans.
Key Points from IRS Notice 2021-15
- Employers that choose to access the Health FSA and/or DCAP relief may allow employees to carryover full account balances from the 2020 and/or 2021 plan years or extend their spending grace periods for up to 12 months for plan years ending in 2020 or 2021. However, they do not have to allow all remaining funds to carry over or extend a grace period that long. Instead, Health FSA and DCAP carry-overs can be capped at any amount the plan sponsor chooses. Grace periods can be any length between the typical 2.5 months and the new maximum of 12.
- Employers are also permitted to make different choices for Health FSAs than they do for DCAP plans if they offer both and can elect to provide some form of relief for just one and not both if they feel like it. An employer that offers multiple health FSAs or dependent care assistance programs may also adopt differing relief for each particular health FSA or DCAP option.
- Funds carried over or available during an extended claims period will not be taken into account for purposes of the nondiscrimination rules applicable to § 125 cafeteria plans and dependent care assistance programs under § 129.
- Amounts carried over or available through an extended grace period do not count towards annual contribution limits. Also, when an employer reports DCAP contributions in Box 10 of Form W-2, they should not consider amounts that remain available due to an extended grace period or are carried over from the prior year.
- All amounts available on the last day of the 2020 or 2021 plan year are available for carryover, regardless of the funds’ source. So if someone carried over $500 from 2019 to 2020 and then contributed $2500 in 2020 and did not spend any of it, up to $3000 could be carried over for use in 2021.
- For employers with plan years or grace periods ending in 2020, amounts made available during that extended claims period that remain unused as of December 31, 2020, are available to be carried over too.
- If an employer allows an expanded carryover, they can require employees to enroll in the Health FSA or DCAP with a minimum election amount to access the unused amounts from the prior plan year.
- If an employer adopts both a carryover from the 2020 calendar year to the 2021 plan year and the flexibility for mid-year election changes, and an employee later elects to participate in the health FSA or dependent care assistance program mid-year on a prospective basis, the carryover amount may be made available to reimburse employee expenses retroactive to January 1, 2021,
- For HSA contribution purposes, the carryover of unused Health FSA amounts to the 2021 plan year or the 2022 plan year will be considered non-HSA qualified coverage (except in the case of an HSA-compatible health FSA, such as a limited-purpose Health FSA). Therefore, an individual accessing those funds would not be eligible to make HSA contributions. However, an employer may allow employees, on an employee-by-employee basis, to opt-out of a carryover to preserve their HSA eligibility.
- For COBRA purposes, an employer cannot count funds carried over or available through an expanded carryover or extended period for incurring claims towards the health FSA COBRA premium.
- COBRA eligibility or an election is not necessary to qualify for a limited extension of Health FSA coverage incurred after the termination of participation and through the end of the plan year (including any grace period) if an employer elects that option for former participants.
Opting for any or all of this Health FSA and DCAP relief is entirely at the discretion of the employer sponsoring the Section 125 plan. However, any changes an employer elects due to the CAA and Notice 2021-15 will require appropriate Section 125 plan amendments. A plan sponsor has until the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective to make all necessary plan document changes. For example, if a plan renewing on March 1, 2021, decides to make changes that affect the 2021 plan year, they would have until December 31, 2022, to make the appropriate amendments to their Section 125 plan document.
Mid-Year Health Plan Elections for the 2021 Plan Year
Besides providing Health FSA and DCAP relief implementation guidance, Notice 2021-15 permits employers to allow employees to make prospective health, dental, or vision plan changes during the 2021 plan year without experiencing a qualifying life event. According to the guidance, an employer may amend one or more of its § 125 cafeteria plans to allow employees to:
- Make a new election for employer-sponsored health, dental, or vision coverage on a prospective basis if the employee initially declined to elect employer-sponsored health coverage;
- Revoke an existing election and enroll in a different plan sponsored by the same employer on a prospective basis (including changing enrollment from self-only coverage to family coverage); or
- Revoke an existing election for employer-sponsored health coverage on a prospective basis, provided that the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer.
It is important to note that just like with the Health FSA and DCAP changes, Notice 2021-15 aims to provide employers with maximum flexibility. No employer has to allow for any of these plan changes. Also, employers have the flexibility to let employees access all or any combination of the election change options. Group plan sponsors also may limit any or all election change time-frames to specific dates.
This relief is very similar to what the IRS allowed employers to do in May of 2020 through Notice 2020-29 concerning employee health plan elections during the 2020 plan year. The relief applies to any group health insurance plan sponsor that offers pre-tax benefits via a Section 125 cafeteria plan, including fully-insured and self-funded group plans. Employers can take advantage of this relief right away, and groups have until the end of 2022 to make retroactive cafeteria plan amendments.
Plan Amendments for Reimbursement of New Qualified Medical Expenses
The final section of Notice 2021-15 addresses a 2020 CARES Act provision that allows employers to treat expenses for menstrual care products and over-the-counter drugs without prescriptions as reimbursable medical expenses through either a Health FSA or HRA. Typically a plan cannot reimburse medical expenses unless the plan covered the item or service on the date incurred. This notice will allow health FSAs and HRAs to amend their plans and back-date the reimbursable period for these items to on or after January 1, 2020. This relief includes new plan amendments regarding CARES Act reimbursable expenses and any amendments made before the IRS issued Notice 2021-15.