TEMPORARY SPECIAL RULES FOR HEALTH AND DEPENDENT CARE FSAs IN THE CAA, 2021

Temporary Special Rules for Health and Dependent Care FSAs in the CAA, 2021

The Consolidated Appropriations Act, 2021 (CAA) effective December 27, 2020, includes voluntary rules for plan sponsors offering health and/or dependent care flexible spending arrangements (FSAs). The CAA’s voluntary rules will benefit participants with unused FSA funds.

The bullets below include some key takeaways from the CAA. Additional details are noted further below.

• Carryover For plan years ending in 2020 or 2021, the CAA permits cafeteria plans offering healthcare and/or Dependent Care FSAs to include a carryover feature.
• Grace Period The maximum FSA grace period length increased from two months and 15 days to 12 months.
• Dependent Age The maximum age of a dependent for purposes of incurring eligible Dependent Care FSA expenses increased from 13 to 14 for certain participants.
• Elections A participant may modify his or her elected FSA contribution amount on a prospective basis (subject to the IRS limits), for any reason.
• Amendments Plans adopting any CAA-permitted changes must be amended by the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective.

Carryovers
For plan years ending in 2020 or 2021, the CAA permits, but does not mandate, cafeteria plans offering healthcare FSAs and/or Dependent Care FSAs to include a carryover feature.

For plan years ending in 2020, the FSA may allow participants to carry over unused amounts remaining in the FSA at the end of the plan year to the plan year ending in 2021.

For plan years ending in 2021, the FSA may allow participants to carry over unused amounts remaining in the FSA at the end of the plan year to the plan year ending in 2022.

The CAA provides that the permitted carryover would be allowed under rules similar to the rules generally applicable to health FSAs.

Grace Period Extensions
For plan years ending in 2020 or 2021, the CAA permits, but does not mandate cafeteria plans offering health FSAs and/or dependent care FSAs with a grace period to extend the grace period to 12 months after the end of the plan year. This increases the maximum grace period length from two months and 15 days to 12 months.

In addition, the CAA permits FSAs to reimburse terminated participants for expenses incurred through the end of the plan year in which the participant ceased participation in the FSA, (including any grace period, taking into account any modification of a grace period permitted under the CAA) provided the participant terminated participation in the calendar year 2020 or 2021.

Special Carry Forward Rule for Dependent Care Flexible Spending Arrangements Where Dependent Aged Out During Pandemic.
The CAA increases the maximum age of a dependent for purposes of incurring eligible dependent care FSA expenses to 14 years, from 13 years, for certain dependent care FSA participants.

This extension applies to a Dependent Care FSA participant who has one or more dependents who turned 13 years during the last plan year whose enrollment period ended on or before January 31, 2020 (the “2020 plan year”).

For calendar year plans, the rule applies to a Dependent Care FSA participant with a dependent who turned 13 years old during calendar year 2020.

In addition, this extension applies during the subsequent plan year if such a participant has unused amounts in the Dependent Care FSA at the end of the 2020 plan year (determined as of the FSA’s claims submission deadline for the 2020 plan year) after applying the extension.

Permitted FSA Election Changes
Under the CAA, FSAs may permit a participant to change his or her elected FSA contribution amount on a prospective basis (subject to maximum dollar limitations on FSA contributions), for any reason. The participant does not have to experience5 a change in status to make this election change.

Plan Amendments
Plans adopting any of the plan design changes permitted by the CAA must be amended by the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective. In addition, the plan must be operated consistent with the terms of the amendment from the date the amendment is effective, even if prior to the actual amendment adoption date.

For example, a plan adopting the carryover for the Dependent Care FSA plan year ending December 31, 2021 must adopt the related plan amendment by December 31, 2022.