IRS Clarifies Relief for Health FSA Benefits under the Consolidated Appropriations Act of 2021

As noted in our prior blog posts here and here, Section 214 of the Consolidated Appropriations Act of 2021 (“Act”) permits employers to amend their flexible spending account (FSA) plans to help participants avoid forfeiting unused amounts for the 2020 and 2021 plan years.  The Act offers employers a myriad of temporary relief options for health FSAs—including expanded carryover relief, extended grace period relief, mid-year election change relief and post-termination spend down relief.  The IRS recently issued Notice 2021-15 (“Notice”) giving employers significant flexibility to tailor these relief options to their particular concerns and objectives.  This blog post answers common questions about how the guidance applies to health FSA benefits; the application to dependent care FSA benefits will be discussed in a forthcoming blog post.

Employers should keep in mind that:

  • All of the relief options are optional. An employer can choose not to adopt any of them or can adopt only some options.
  • All of the relief options require plan amendments.
  • The options do not permit participants to receive refunds of their unused contributions.
  • The options do not permit participants to use health FSA balances for dependent care expenses or vice versa.

Please note that the FSA provisions permitted by the Act and the related IRS guidance are complex.  Plan sponsors are encouraged to evaluate the impact of the permitted changes on their particular FSA plan, including an assessment of the impact on potential forfeitures and the additional administration required to implement FSA relief permitted by the Act.

If our Plan adopts the expanded carryover relief or extended grace period relief, can the relief carry forward for multiple Plan years?

Yes.  For the carryover, the Notice provides that any unused amounts remaining in health FSA accounts at the end of plan years ending in 2020 or 2021 can be carried forward into the immediately subsequent plan year, even if the amount exceeds the maximum carryover amount otherwise provided by the plan and regular IRS limits, and regardless of the source (employer or employee contributions) or when the funds were contributed to the account.  Similarly, an employer can amend its FSA plan to allow a 12-month grace period so that any unused amounts remaining at the end of the 2020 plan year can be used for expenses incurred during the 12 months after the 2020 plan year ends, and any unused amounts at the end of the 2021 plan year (including 2020 amounts still remaining at the end of 2021) can be used for expenses incurred during the 12 months after the 2021 plan year ends.  As a result, if money contributed in 2020 is not used in 2021, it can be used in 2022.  This relief is available for plan years ending in 2020 and 2021 regardless of whether the normal plan design includes a carryover or a grace period.  (As discussed below, an employer is permitted to suspend an existing health FSA grace period or carryover provision as necessary for the plan year(s) in which the temporary expanded carryover or grace period provision applies.)  For plan years ending in 2022 and after, the relief ends, and a health FSA may include a regular carryover (currently $550, and as indexed in future years) or a regular grace period (2-1/2 months), but not both.

If our Plan adopts the expanded carryover or extended grace period relief, can an employee be eligible to make or receive Health Savings Account (HSA) contributions?

No.  The extension of the grace period is considered an extension of coverage by a non-high deductible health plan (HDHP).  Accordingly, an individual is not eligible to make or receive HSA contributions if the individual participates in a general purpose health FSA during the extended grace period, except if the individual has a $0 balance in the general purpose health FSA at the end of the plan year to which the grace period applies.  However, plan sponsors can amend their plans to allow employees to opt out of the health FSA expanded carryover or the extended grace period, or to elect to convert the health FSA to a “limited purpose” FSA for the extended grace period, in order to preserve HSA eligibility.  An employer can also provide in the plan amendment that, during the grace period (or a period of expanded carryover) the unused health FSA balance will automatically convert to a limited purpose FSA for anyone then enrolled in the employer’s HDHP.

Can our Plan adopt both the unlimited carryover relief and the extended grace period relief for the same health FSA for the same plan year?

No.  The Notice provides that an employer cannot offer both forms of relief for the same health FSA for the same plan year and that any plan amendment must identify which form of relief is adopted.  In addition, plan sponsors should note that although they are similar in their effect, these two forms of relief interact differently with the health FSA spend-down relief.  For a health FSA that adopts a grace period, the health FSA spend-down relief allows employees who terminate participation in a health FSA to incur reimbursable claims until the end of the plan year following the plan year in which the employee’s participation terminated (i.e., until the end of the grace period).  However, for a health FSA that adopts the carryover relief, employees who terminate participation in the health FSA may only incur reimbursable claims for the year in which the employee’s participation terminated.

Does that mean we can’t adopt the expanded carryover relief if we normally have a grace period or we can’t adopt the extended grace period relief if we normally have a carryover provision?

No.  While a health FSA plan still cannot have both a grace period and a carryover in effect for the same plan year, the Notice gives employers the flexibility, in a plan amendment, to suspend a grace period provision to apply the expanded carryover relief for a plan year or to suspend a carryover provision to apply the extended grace period relief for a plan year.

If our Plan adopts the mid-year health FSA election change relief, can we implement any limitations with respect to mid-year election changes?

Yes.  Amending the plan to permit prospective mid-year health FSA election changes is optional.  Employers may prescribe certain parameters around mid-year election changes, such as:

  • Setting a specified date by which employees are permitted to make mid-year election changes without a status change and then requiring a status change after the specified date.
  • Limiting the number of election changes a participant may make during the relief period.
  • Limiting mid-year election changes to circumstances when an employee’s coverage will be increased or improved.

In addition:

  • If an election is revoked, the plan can either permit amounts contributed before the revocation to remain available to reimburse claims incurred during the rest of the plan year or limit reimbursable claims to those incurred prior to the revocation.
  • A plan can permit employees to elect to revoke elections under a health FSA as of a future specified date.

Note that mid-year election changes may be prospective only.  The Notice does not permit retroactive changes to health FSA elections.

If our Plan adopts the health FSA post-termination spend down relief and a terminated participant experiences a qualifying event under COBRA, is a COBRA election notice with respect to the health FSA still required?

Yes.  Individuals who experience a qualifying event under COBRA retain their right to elect COBRA continuation coverage for their health FSA, even if the plan adopts the health FSA post-termination spend-down relief.  Therefore, a COBRA election notice is still required.

When must our Plan be amended for the relief described in the Notice?

Plan amendments to incorporate relief provided by the Act, as described in the Notice, may be retroactive as long as they are adopted no later than the last day of the first calendar year beginning after the end of the plan year in which the relief is effective.  For example, for changes effective for the 2020 calendar plan year (such as a change permitting unlimited carryovers from 2020 to 2021), amendments must be adopted by December 31, 2021.  Plans must, however, operate consistently with the changes made beginning with the effective date of the change.  Employers must also notify eligible employees of the changes to the plan.