As part of the COVID stimulus package passed by Congress at the end of 2020, employers are once again allowed to modify their cafeteria plans temporarily to offer more flexibility for employees. Similar changes were allowed earlier in 2020.
Let’s take a look at the newly allowed changes and some issues you may want to consider before adopting them.
Unlimited Carryover. Employers can modify their health FSA and dependent care FSAs (DCFSAs) to allow carryover of all unused amounts from 2020 to 2021 and from 2021 to 2022. This is for employers that currently offer a carryover or want to start offering one. Ordinarily, such carryovers are limited to $550 annually, although some plans have lower carryover limits.
The logic for making this change is that employees may not have had the opportunity to spend money in their FSAs due to the COVID pandemic. We strongly recommend considering this option, at the very least for the 2020 plan year. Employers may want to run a report of their employees’ year-end balances in their FSAs to determine: 1) whether any of them would benefit from the change; and 2) the financial impact it could have on the employer to allow employees to keep their entire FSA balances rather than forfeiting amounts in excess of their current carryover limit.
Extended Grace Period. The legislation allows employers to adopt up to a 12-month grace period for employees to spend funds remaining in their health and dependent care FSAs at the end of the 2020 and 2021 plan years. There are pros and cons of doing this, but it could be especially problematic for employers that offer an HSA-eligible high deductible health plan. Employers that currently offer both a grace period and an HSA might want to consider switching from the grace period to a carryover. Your Miller team can help you work through these issues.
Extended Runout for Former Employees. Employers may choose to allow health FSA participants who terminated their employment in 2020 (or 2021) to spend down their unused balances for expenses incurred through the end of the year.
The rationale for making this change is not strong. First off, the legislation allowing it was passed so late in the year that it was pretty much impossible to implement it for employees whose employment ended in 2020. Second, employees already have the option of electing COBRA for any FSA funds that remain unspent when their employment ends.
Increased Age for Dependent FSAs. The maximum age for eligible dependents in a dependent care FSA can be raised from 12 to 13 for the 2020 plan year. More specifically, if a child turned 13 in 2020, the employee may be reimbursed for expenses incurred after the child’s 13th birthday for the remainder of 2020. In addition, if there is an unused balance at year’s end, dependent care expenses may be reimbursed in the following plan year (i.e., 2021) until the child turns age 14.
We don’t see a downside to allowing this, and it could potentially be very helpful for families with younger kids. Again, you might want to determine whether you have any employees with a remaining balance in their DCFSA before making this change.
Unlimited FSA Election Changes. Employers can permit prospective changes in election amounts for health and dependent care FSAs for plan years ending in 2021 without a corresponding change in status event.
- Employers are not required to adopt any of these changes and may adopt only some or even none of them.
- While from a compliance perspective you have some time to adopt plan amendments, some FSA administrators are looking for a quick turnaround in order to implement the changes for 2020 before any grace period or runout period expires. Most of them have been quick to send out communications in this regard.
- Feel free to contact me or your Miller account team for additional assistance and guidance.