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Temporary Rules for FSAs

Unlike the first coronavirus relief legislation, the CARES Act, the new bill signed into law on December 27 includes not only stimulus payments to offset the effects of the pandemic but general funding for the federal government for the coming fiscal year. Hence its name: The Consolidated Appropriations Act.

In addition to the hotly debated personal stimulus payments, the Act contains other provisions aimed at pandemic relief, among them some temporary changes to the rules for flexible spending accounts (FSAs). Employers should understand what’s changed.

With so many activities having been restricted as a result of COVID-19 in the year just ended, employees are likely to have unused amounts in health or dependent care FSAs. For that reason, employers are now permitted to do the following for plan years ending in 2020 and 2021:

  • Permit employees to carry over unused amounts to the next plan year.
  • Extend the grace period to 12 months after the end of that plan year (from the current 2 months, 15 days).
  • Allow employees who cease participating in a plan during 2020 or 2021 to continue to receive reimbursements from unused amounts through the end of the plan year in which their participation ended.

For dependent care FSAs, there’s a special ‘carry forward’ rule in cases where the dependent aged out during the pandemic, and the maximum age is increased from 13 to 14 years old.

Employees may also prospectively modify the amount of their FSA contributions for 2020 and 2021, even if their plan status has not changed. Applicable dollar limits will continue to apply.

A final item of interest is that employers may adopt FSA plan amendments retroactively, on two conditions:

  • The plan must be operated consistently within the amendment terms until the amendment is adopted.
  • The amendment must be adopted by the last day of the first calendar year following the plan year in which it is made effective. In other words, a retroactive change to a 2020 plan would need to be adopted by the end of 2021.

Questions about the new legislation and its impact on your benefits? Contact Consolidated Insurance.

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