Legal Bulletins

President Joseph Biden, Jr. signed into law the Consolidated Appropriations Act, 2021 (the Act) late last month. Tucked into the Act’s nearly 6,000 pages were some important provisions governing cafeteria plan health and dependent care flexible spending arrangements (FSAs).

Most notably, the Act:

1. Allows an employer to authorize a participant to carry over his or her entire unused health or dependent care FSA balance from 2020 and 2021 to the next plan year. For example, a cafeteria plan with a health or dependent care FSA will not lose its tax-favored status if it allows a participant to carry over all of his or her unused FSA benefits or contributions from 2020 to 2021 or from 2021 to 2022. Prior to the Act, the maximum carryover amount was limited to health FSAs and only as to $550. Under the Act, if an employer voluntarily makes the change, all of a participant’s health and dependent care FSA unused account balance may be carried over for a limited time.
    
2. Allows a 12-month grace period, limited to the 12-month period following plan years ending in 2020 and 2021, during which a participant may use his or her remaining prior year’s FSA balance to pay new FSA qualified health or dependent care expenses. Prior to the Act, the grace period extended typically only for a 2 1/2 month period following the close of a plan year. Either the extended grace period or carryover provisions may be elected by an employer — but not both.
    
3. Allows a health FSA participant who is terminated from employment in 2020 or 2021 to continue to receive reimbursements from unused benefits or contributions from his or her unused FSA account balance for the remainder of the plan year and any associated subsequent grace period.
    
4. Increases the age limit, from under 13 to under 14, for which qualified dependent care expenses may be paid from a dependent care FSA.
    
5. Allows a health or dependent care FSA participant for plan years ending in 2021 to modify prospectively his or her FSA contribution amount regardless of any change in status.

For many, the COVID-19 pandemic meant that many health and dependent care FSA benefits went unused in 2020 — and similarly may be unused in 2021. For example, shutdowns and remote work mandates reduced the need for dependent child care expenses. Further, as a result of prioritizing COVID-19 patients, health care procedures were greatly reduced or postponed in 2020. As a result, many health and dependent care FSA participants risked forfeiting most, if not all, of their health and dependent care FSA account balances under the “use-it-or-lose-it rule” for FSAs. By including the above changes in the final bill, Congress provided relief to health and dependent care FSA plan participants who would otherwise forfeit the balance of their FSA accounts.

As noted, the foregoing changes are all optional for cafeteria plans. Cafeteria plan sponsors have until the last day of the calendar year after the year in which any change is effective to adopt a retroactive amendment. For example, if for a calendar year plan, an amendment is effective January 1, 2021, a plan sponsor will have until December 31, 2022, to formally adopt an amendment implementing changes to health and dependent care FSAs. These changes will be subject to any IRS guidance that is issued in the future.

Please contact Theodore P. Stein with any questions about this topic.

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Theodore P. Stein

410-576-4229 • tstein@gfrlaw.com