Since the December 2020 announcement of the Consolidated Appropriations Act (CAA), Congress and the Internal Revenue Service (IRS) have made several regulatory changes to address the continued impact of the COVID-19 pandemic. These changes, many of which impact flexible spending accounts, are not mandatory. This means spending account administrators needed to decide which changes they could support. Organizations need to make thoughtful decisions as to which regulatory changes available for their plans are worthy of consideration, especially as employers approach open enrollment season.
The changes are igniting plenty of questions — for which benefits managers will need answers to help their employees maximize their health saving and spending account benefits.
Here are some key changes that benefits managers should know:
- Legislation now allows plans to permit employees with flexible spending accounts (FSAs) and dependent care assistant programs (DCAPs, also known as dependent care FSAs) to carry over all unused amounts from plan years ending in 2021 and plan years ending in 2022.
- Similarly, plans may permit a 12-month grace period for unused benefits for plan years ending in 2021. The grace period gives employees an opportunity to spend down their balances from the previous plan year on expenses made in the new year.
- Plans are also given the option to allow medical FSA participants, who terminate their employment during 2021, to spend down their unused balances for expenses incurred through the end of the plan year and any subsequent grace period.
- Plans may allow a prospective change in election amounts for FSAs and DCAPs in 2021 without a corresponding change in status event.
- The maximum amounts for DCAPs increased from $5,000 to $10,500 for married parents filing taxes jointly or for single parents, and from $2,500 to $5,250 for married parents filing separately per calendar year. Please note that these limits apply to the 2021 tax year, and that non-calendar year plan participants should take this into consideration when making annual elections.
Here’s a quick guide to help benefits managers wade through some of the details:
What is the deadline for amending plan documents?
Companies must amend their plan document if they wish to offer any of these features. Amendments must be adopted by the last day of the first calendar year beginning after the end of the plan year in which the amendment is retroactively effective. For example, a calendar year FSA would need to adopt an amendment by December 31, 2022, for changes to the 2021 plan year.
Is there a tax impact to individuals with a DCAP if they exceed $5,000 after 2021? Possibly. Non-calendar year plan members should pay close attention as amounts elected in 2021 that are brought into 2022 are subject to the $5,000 annual limit, and amounts over the limit are subject to income tax.
How much can be carried over from 2021 to 2022?
All unused funds may be carried over from 2021 to 2022 if a plan allows for it.
What is the DCAP special age limit?
Under normal rules, employees can only use their DCAP to pay for day care expenses for dependents up to their 13th birthday (or, if they’re older, with a letter of medical necessity). The CAA temporarily increased the maximum age of eligible dependents by one year — allowing employees to use their DCAP to pay for dependent care expenses until the child reaches the age of 14.
Can election changes be made mid-year?
Another new option stemming from the CAA allows for mid-year election changes for group medical, dental and vision coverage — without a corresponding change in status event. This includes enrolling in an account, unenrolling, and increasing or decreasing the elected amount (within the IRS limits). Employers may limit the changes that can be made, however.
Can an employer without a grace period attached to its 2020 plan year still adopt one?
Yes, a group could add a grace period if It did not offer one before.
These changes, and more, are documented in Further’s new white paper and infographic, created to help simplify all the recent COVID-19 regulatory changes impacting health spending accounts. Further’s “How the Consolidated Appropriates Act (CAA) of 2021 and Other Post-CARES Act Regulatory Changes Address the Impact of the Coronavirus“ white paper and infographic can be downloaded here.
Ryan McArton is Chief Compliance Officer and Counsel for Further, a leader in health care spending and savings account administration.