As we discussed in our previous blog post, Temporary Relief Allows Flexible Spending Arrangements to be More Flexible, Section 214 of the Consolidated Appropriations Act, 2021, Pub. L. 116-260 (the “Act”), allows employers to offer an extended use-it-or-lose-it and/or extended spend-down periods during which participants in a health flexible spending arrangement (“ health FSA”) may have access to unused health FSA amounts until the end of the subsequent plan year and/or after they terminate participation in the health FSA mid-year, respectively. In certain cases, access to unused health FSA amounts can make an individual ineligible to contribute to a health savings account (an “HSA”).
Continue Reading Preserving HSA Eligibility With An Extended Health FSA Use-It-Or-Lose-It Period
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Temporary Relief Allows Flexible Spending Arrangements to be More Flexible
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.
Continue Reading Temporary Relief Allows Flexible Spending Arrangements to be More Flexible
IRS Empowers Employers to Increase Health Coverage, FSA Election Flexibility During Pandemic; Clarifies HDHP COVID-19 Relief
On May 12, 2020, the Internal Revenue Service (“IRS”) published Notices 2020-29 and 2020-33. Notice 2020-29 is the latest installment in COVID-19 relief guidance targeted at health and welfare benefits. The Notice enables employers to provide flexibility to employees to modify their health coverage and flexible spending account (“FSA”) elections and gives employees until the end of 2020 (but not 2021) to use certain FSA amounts that may otherwise be forfeited. Unlike certain COVID-19 relief related to retirement plans, employers may make the relief under Notice 2020-29 available to all participants, regardless of whether they have suffered a COVID-19-related loss.
Notice 2020-33 allows employers to adopt an indexed maximum carryover amount for health FSAs, beginning with amounts that may be carried over from the 2020 plan year to the 2021 plan year.Continue Reading IRS Empowers Employers to Increase Health Coverage, FSA Election Flexibility During Pandemic; Clarifies HDHP COVID-19 Relief
Changes to the “Use-Or-Lose” Rule Add Flexibility to Health FSAs
The IRS issued a notice on October 31 modifying the long-standing “use-or-lose” rule that applies to health flexible spending arrangements (“Health FSAs”). The new rule permits participants to apply up to $500 of unused Health FSA contributions to pay for expenses incurred in the next plan year, if the employer amends its Health FSA to permit such carryovers. Although plan sponsors are not required to offer the carryover, for the first time in 30 years, they have the option to do so.
Participants in Health FSAs may contribute up to $2,500 per year (indexed) to a Health FSA on a pre-tax basis to pay for medical expenses not otherwise covered by an employer’s health plan. Health FSAs come at a price, however — generally, unused amounts contributed to a Health FSAs must be forfeited at the end of the year and cannot be carried over to a future year or cashed out. The IRS modified this rule in 2005, permitting plans to adopt a “grace period” that allows a participant to use contributions made in one year to pay for medical expenses incurred during the first 2 ½ months of the next year.
In response to public comments, and in particular the concern that the forfeiture requirement was discouraging lower paid employees from making Health FSA contributions, the IRS has now added another option for employers — they may amend their Health FSA plans to permit employees to carry over $500 in contributions from year 1 to pay year 2 medical expenses. Employers are not required to permit carryovers, and may specify a carryover amount of less than $500.Continue Reading Changes to the “Use-Or-Lose” Rule Add Flexibility to Health FSAs