The Consolidated Appropriations Act
The American Rescue Plan Act
And Your FSA
The Consolidated Appropriations Act, 2021 was approved by Congress on December 21, 2020, and signed into law on December 27, 2020. It includes the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (Disaster Relief Act) and the COVID-related Tax Relief Act of 2020 (COVID Relief Act). The Disaster Relief Act and the COVID Relief Act extend a myriad of credits and other COVID-19 relief, among many other extenders. The following is a review of the important employee benefit provisions:
UNLIMITED CARRYOVER
Section 214 of the Disaster Relief Act expands on this relief by permitting employers to amend FSAs to allow participants to carry over to the plan year ending in 2021 any unused amounts that would have expired at the end of a plan year ending in 2020. Similarly, any unused amounts that would have expired at the end of a plan year ending in 2021 may be carried over to the plan year ending in 2022. Plan amendment required.
EXTENDED GRACE PERIODS
Employers are allowed to amend their FSAs to provide a grace period of up to 12 months after the end of a plan year ending in 2020 or 2021. These rules apply equally to health FSAs and dependent care FSAs and are not subject to dollar limitations. Plan amendment required.
POST-TERMINATION REIMBURSEMENTS
A health FSA may be amended to allow employees who cease participating in the plan during 2020 or 2021 (e.g., as a result of termination of employment) to continue to receive reimbursements from any unused amounts through the end of the plan year in which the participation ended, including any grace period or extended grace period. This rule is analogous to the existing rules for dependent care FSAs. Plan amendment required.
CHANGES TO EMPLOYEE ELECTIONS
The relief is extended allowing employers to permit employees to modify prospectively the amount of contributions to health and dependent care FSAs, without regard to whether the participant satisfies the normal requirements for mid-year election changes. Plan amendment required.
CARRY-FORWARD FOR AGED OUT DEPENDENTS
A temporary rule extends the maximum age of eligible dependents for purposes of determining eligible dependent care FSA expenses from under age 13 to under age 14. The rule applies to the plan year for which open enrollment ended before January 31, 2020, including any unused amounts from that plan year that may be available in the following plan year as a result of a plan’s rollover or grace period. Plan amendment required.
The American Rescue Plan Act
The American Rescue Plan 2021 was approved by Congress on March 10, 2020, with important provisions that affect employers. The package was signed into law March 11, 2021.
Dependent Care FSAs:
The Dependent Care FSA limit is increasing for tax year 2021 (only) from $5,000 to $10,500 (from $2,500 to $5,250 for married filing single). Dependent Care contribution amounts have not been increased since 1986, and as such has taught many employees to carefully budget their expenses as a “use it or lose it” rule has always applied. Plan amendment required.
