Many employers are familiar with flexible spending arrangements (FSAs) and the benefits they can offer to both the company and its employees. FSA plans allow participating employees to set aside a certain amount of wages on a pre-tax basis to cover qualifying medical and dependent care expenses. A caveat is that the amount to put aside for a given plan year must be determined in advance and cannot be changed until the next plan year; unused funds are generally forfeited at the end of the plan year.
In 2020, the impacts of COVID-19 resulted in many childcare facilities being forced to shut their doors. Healthcare services were limited in many areas to allow for emergency and critical services only. This means that there is a good chance that employees who participated in FSA plans during the pandemic may have significant unused balances in the plan year. With FSA contribution limits as high as $2750 for healthcare and $5000 for dependent care, employees who were unable to spend these funds could potentially be losing out on a large chunk of their pay.
In response to this, the Taxpayer Certainty and Disaster Tax Relief Act
includes provisions that temporarily eased the FSA rules, for the benefit of individuals participating in these plans with their employers.
- Allow for carryover of unused benefits between plan years
- A 12-month grace period for unused benefits or contributions in health and dependent care FSA plans
- Raised the maximum age of eligible dependents from 12 to 13 for qualifying dependent care expenses
- Allows plans to permit a prospective change in election amounts for health and dependent care FSAs
While this guidance provided flexibilty through 2020, it’s clear that COVID-19 is still affecting businesses and employees well into 2021. With this in mind, the IRS has released further guidance providing flexibility for health and dependent care FSAs. Under notice 2021-15, many of the provisions from 2020 are being carried over to 2021. These temporary special rules allow employees to take advantage of the pre-tax savings offered through their employers’ FSA plans with a much lower risk of forfeiture due to unanticipated and unforseen circumstances due to the pandemic.
Even with these special rules, it’s important to note that employers may determine the extent of which certain changes are allowed, and not all plans are necessarily created equal. Employees with questions should reach out to their benefits administrator or service provider for any plan-specific items. These are also temporary changes, and could be subject to further changes and revisions as the IRS deems necessary.