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IRS Provides Needed Flexibility for Health FSAs

New guidelines to employee benefit plans for 2020 and 2021

On February 18, 2021, the Internal Revenue Service announced greater flexibility to employee benefit plans offering health flexible spending arrangements (FSAs) or dependent care assistance programs. Under the COVID-related Taxpayer Certainty and Disaster Tax Relief Act of 2020, these plans now have additional discretion in 2021 and 2022 to adjust their programs to help employees.

Under such health flexible spending arrangements or dependent care assistance programs, an employer allows employees to set aside a certain amount of pre-tax wages to pay for future medical care and dependent care expenses. Then money spent by the employee for such expenses is reimbursed by the employer from the appropriate account.

The appeal of such programs is that the amounts properly spent are not subject to federal income tax. The downside is that generally speaking, money not spent by the employee within the plan year are forfeited (although there are limited grace periods and certain carryover amounts). 

As a result of COVID-19, the IRS determined that many employees will likely have unused health FSA amounts at the end of 2020 and 2021, so the IRS is adding flexibility and amending its rules.

The IRS Press Release

“Notice 2021-15 provides flexibility for employers in the following areas related to health FSAs and dependent care assistance programs:

  • Provides flexibility for the carryover of unused amounts from the 2020 and 2021 plan years;
  • Provides flexibility to extend the permissible period for incurring claims for plan years ending in 2020 and 2021;
  • Provides flexibility to adopt a special rule regarding post-termination reimbursements from health FSAs;
  • Provides flexibility for a special claims period and carryover rule for dependent care assistance programs when a dependent "ages out" during the COVID-19 public health emergency; and
  • Allows certain mid-year election changes for health FSAs and dependent care assistance programs for plan years ending in 2021.

Prior guidance provided flexibility to employers with cafeteria plans through the end of calendar year 2020, during which employers could permit employees to apply unused health FSA amounts and dependent care assistance program amounts to pay for or reimburse medical care or dependent care expenses. The Taxpayer Certainty and Disaster Tax Relief Act of 2020, signed into law on December 27, 2020, provides similar flexibility for these arrangements in 2021 and 2022.”

Check With Your Employer

While millions of employees have access to health FSAs and dependent care assistance programs under "cafeteria plans,” the decision to adjust these benefit programs is up to the employer that sponsors the plan.

So, be sure to check with your employer to see if they intend to amend their plan so that you don’t risk of the money that you might have set aside.

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