Section 214 of the Consolidated Appropriations Act, 2021, Pub. L. 116-260 (the “Act”), allows sponsors of health and dependent care flexible spending arrangements (“FSAs”) to delay forfeitures of unused account balances for 2020 and 2021 plan years and grant participants, including former participants, more time to spend down account balances. Section 214 and implementing guidance also give employers another opportunity to allow participants to change their elections with respect to FSAs and health plans. On February 18, 2021, the Internal Revenue Service (“IRS”) issued IRS Notice 2021-15 to help explain and expand the parameters of this relief.

Delayed Forfeitures of 2020 and 2021 Account Balances

Employers may permit rollovers of any unused amounts in a health FSA or dependent care FSA from the 2020 plan year to the end of the 2021 plan year and/or from the 2021 plan year to the end of the 2022 plan year. Employers may limit the amount of the rollover or duration of the extended period for which expenses will be eligible for reimbursement from rollovers (the “Extended Use-It-Or-Lose-It Period”) to less than what is permitted under the Act.

  • This option is available regardless of whether the FSA normally has a two-and-a-half month grace period during which unused amounts from the previous year may be used to reimburse expenses incurred during the grace period, permits a carryover of up to $550 (in the case of a health FSA) to be used for expenses incurred through the end of the subsequent year, or requires that all unused amounts be forfeited on the last day of the plan year.
  • The Extended Use-It-Or-Lose-It Period applies to all unused amounts in the participant’s account as of the end of the applicable plan year, regardless of the source of the amounts. For example, if the FSA has a non-calendar year plan year and previously took advantage of the relief under IRS Notice 2020-29 – which extended the claims period for the 2019 plan year until December 31, 2020. Any unused amounts left in the participant’s account as of December 31, 2020, even if attributable to 2019 monies, may be rolled over to the 2021 plan year, if the employer adopts an Extended Use-It-Or-Lose-It Period with respect to the 2020 plan year.
  • The Extended Use-It-Or-Lose-It Period can be characterized as either an enhanced carryover or an enhanced grace period. One of the primary reasons to characterize the Extended Use-It-Or-Lose-It Period as an enhanced grace period is to provide for up to an additional year for the extended spend-down period for terminated participants, as explained below.
  • If an Extended Use-It-Or-Lose-It Period of less than 12 months is characterized as a grace period, any unused amounts remaining at the end of the grace period cannot be made available for any subsequent Extended Use-It-Or-Lose-It Period or regular grace period (because the unused amounts would not be in the account on the last day of a plan year).
  • Rollover amounts available during an Extended Use-It-Or-Lose-It Period are not taken into account in determining the annual salary reduction limit applicable for the plan year that includes the Extended Use-It-Or-Lose-It Period.
  • Several options are available to employers with high deductible health plans s to design an Extended Use-It-Or-Lose-It Period that preserves HSA eligibility. See our article Preserving HSA Eligibility With an Extended Health FSA Use-It-Or-Lose-It Period for more information on how to preserve HSA eligibility.

Extended Spend-Down Period for Former Participants in FSAs

Employers may allow participants, who terminated participation in a health or dependent care FSA mid-year during 2020 or 2021, to continue to incur, and be reimbursed for, expenses after coverage terminates under the health FSA (i.e., an extended spend-down period). Normally, if a participant terminates participation mid-year, the participant may spend down any remaining unused amounts in a health FSA only if the underlying expenses were incurred prior to the participant’s termination of coverage. If a health or dependent care FSA elects to adopt the enhanced grace period, the extended spend-down period may extend past the end of the of the plan year of termination and through the end of the enhanced grace period. However, if an enhanced grace period is not offered to current participants (e.g., if an enhanced carryover or no Extended Use-It-Or-Lose-It Period is offered), the extended spend-down period for former participants may not extend past the last day of the plan year in which coverage terminated.

The amount available for expenses incurred after terminating coverage may be limited to unused contributions in a health FSA as of the termination date if the employee ceased to be a participant due to termination of employment, change in employment status, or a mid-year election change. If the amount of funds available during the extended spend-down period is limited to the amount of unused, actual contributions as of the termination date, the participant will experience a loss of coverage. If this loss of coverage is coincident with a qualifying event (e.g., a termination of employment), the participant would be considered a qualified beneficiary who may be entitled to access the full amount of the participant’s salary reduction by electing COBRA. An additional COBRA election requirement might be triggered if a subsequent COBRA qualifying event, such as divorce, occurs during the extended spend-down period. COBRA is not required to be offered if participants are offered access to the full amount of their salary reduction election during the spend down period because there would be no loss of coverage.

Temporary Increase in the Age Limitation for Dependent Care FSAs

Section 214 also grants limited relief with respect to expenses incurred for dependents who attain age 13, or “age out” of dependent care FSA coverage, during the 2020 or 2021 plan years. A plan sponsor does not have to adopt an Extended Use-It-Or-Lose-It Period or extended spend-down period to offer this relief to dependent care FSA participants.

When is the age out relief available?

This relief is available during, at most, two plan years:

  1. the last plan year with respect to which the end of the regular enrollment period for such plan year was on or before January 31, 2020 (g., the 2020 plan year for a calendar-year plan with a regular enrollment period in Fall 2019) (the “First Relief Year”); and
  2. the plan year immediately following the First Relief Year, if a participant has an unused balance remaining at the end of the First Relief Year, including any grace period (the “Second Relief Year”).

Who are eligible employees?

Relief is only available to eligible employees. An employee is eligible if the employee:

  1. is enrolled in the dependent care FSA during the First Relief Year; and
  2. has one or more dependents who attain age 13 during (i) the First Relief Year, or (ii) the Second Relief Year, but only if the employee has unused amounts remaining at the end of the First Relief Year (including a grace period, whether or not extended under the Act).

Which amounts are subject to the age-out relief?

All amounts that are available during the First Relief Year may be applied toward a dependent who attains age 13 during the First Relief Year. If an employer permits a rollover of unused amounts from the First Relief Year to the Second Relief Year, those rolled-over amounts may be applied toward (i) dependents who attained age 13 during the First Relief Year, but only until they attain age 14; and (ii) dependents who attain age 13 during the Second Relief Year.

Tax Reporting for Dependent Care FSAs

Amounts contributed to dependent care FSAs in 2019 that are rolled over for use in 2020 do not need to be reported (again) on an employee’s 2020 Form W-2 for the subsequent year. The IRS anticipates providing the same relief with respect to the 2021 and 2022 Forms W-2. In addition, the IRS is expected to update tax publications and forms for individual income tax returns, such as Form 2441, to clarify that reimbursements from dependent care FSAs in excess of $5,000 will not be taxable if the reimbursements are attributable to 2020 or 2021 rollovers during an Extended Use-It-Or-Lose-It Period.

Mid-Year Enrollment Without a Change in Status

Health FSAs and Dependent Care FSAs

For plan years ending in 2021, the Act permits employers to allow health FSA and dependent care FSA mid-year election changes without a corresponding change in status event. This relief is similar to the relief available for 2020 under IRS Notice 2020-29.

Employers have significant flexibility in determining how to structure this relief, if they adopt it. IRS Notice 2021-15 provides for several design options:

  • Plans may permit employees to make any or all of the following changes to elections: (i) make a new election (e., begin participation), (ii) increase an existing election, (iii) decrease an existing election, or (iv) revoke an existing election.
  • Plans may set a window during which elections may be changed without a change of status, but require a change in status for elections outside of that window.
  • Plans may permit a set number of “free” election changes, but require subsequent changes to have a corresponding change in status.
  • Plans may prohibit elections from being reduced to below the amount of reimbursements already received.

All mid-year changes to salary reduction elections must be prospective only. However, if an employee enrolls in or changes his or her election amount mid-year, subsequent salary reduction amounts may be applied toward expenses incurred during the first plan year beginning on or after January 1, 2021. This means that salary reductions may be applied to expenses incurred during 2021 before the employee enrolls in the plan. In addition, if an employee who participated during the prior plan year enrolls mid-year, and the employer has adopted rollover relief or an Extended Use-It-Or-Lose-It Period under the Act, the employee will have access to the unused amounts that remained at the end of the prior plan year on the same terms as an employee who enrolled during open enrollment.

Medical, Dental, and Vision Coverage

Under IRS Notice 2021-15, employers may also permit mid-year elections to enroll in; change elections under; or revoke medical, dental, or vision coverage (“health coverage”). As with the health FSAs and dependent care FSAs, this relief is similar to the relief that was available under IRS Notice 2020-29, but is applicable to plan years ending in 2021.

Employers that wish to permit mid-year changes to health coverage for 2021 may allow employees to (1) make a new election to participate on a prospective basis, (2) revoke an existing election and make a new election to enroll in a different health option or change coverage tiers (e.g., from self-only to family), or (3) revoke an existing election for employer-sponsored health coverage on a prospective basis, provided that they submit an attestation that they are enrolling in other health coverage. An employee may not revoke comprehensive health coverage merely by attesting to enrollment solely in dental or vision benefits.

Nondiscrimination Testing

Subject to the nondiscrimination rules that apply to cafeteria plans (Code § 125) and dependent care arrangements (Code § 129), employers may adopt rollover relief or an Extended Use-It-Or-Lose-It Period for some, but not all, participants and FSAs. Also, rollover amounts available during the Extended Use-It-Or-Lose-It Period are not required to be taken into account a second time for purposes of applicable non-discrimination testing.

Plan Amendment Deadline

Employers must amend their cafeteria plans to reflect any of the optional relief under the Act that they wish to adopt. Plan amendments must be adopted by December 31 of the first calendar year beginning after the end of the plan year in which the amendments are effective. For example, an amendment to a calendar year plan to permit an Extended Use-It-Or-Lose-It Period during which participants have access to any unused amounts from the 2020 plan year during the 2021 plan year is effective for the 2020 plan year (because it prevented the forfeiture of the unused amounts in 2020) and must be adopted by December 31, 2021. An amendment may be retroactive to the start of the plan year in which it is effective, so long as the plan was operated consistent with the amendment throughout the effective period and the change was appropriately communicated to participants. An amendment adopting an Extended Use-It-Or-Lose-It Period must characterized the period as either an enhanced carryover or an enhanced grace period.

Notice 2021-15 also allows retroactive plan amendments for any period beginning on or after January 1, 2020, to implement Section 3702 of the CARES Act, which permits reimbursement of expenses incurred after 2019 for over-the-counter drugs without a prescription and menstrual care products.