Cafeteria Plan Provisions of the Consolidated Appropriations Act, 2021
The Consolidated Appropriations Act, 2021 (the “CAA”) provides employers with the ability to adopt optional relief provisions for participants in cafeteria plans with healthcare and dependent care flexible spending accounts (“FSAs”). These provisions are aimed at preventing forfeiture of unused account balances at the end of the 2020 and 2021 plan years. The unused amounts have often arisen due to the COVID-19 pandemic triggering extended medical provider, school, and daycare closures, and remote work arrangements.
Grace Period Extensions and Unlimited Carryover Amounts
The CAA provides employers with two options for the use of leftover FSA amounts. First, an employer can extend the grace period to use these amounts in the following plan year from two months and fifteen days to twelve months after the end of the plan year. Accordingly, unused FSA amounts as of the end of the 2020 plan year may be used for qualifying medical and dependent care expenses through the end of the 2021 plan year, and unused FSA amounts as of the end of the 2021 plan year can be used for qualifying medical and dependent care expenses through the end of the 2022 plan year.
It is important to note that participants cannot contribute to health savings accounts while healthcare FSA funds are available during a grace period. Thus, participants with leftover healthcare FSA funds at the end of a plan year cannot make contributions to health savings accounts until the end of the grace period. The CAA does not provide any relief for participants subject to the extended grace period for unused healthcare FSA funds but who elect high-deductible health plans with health savings accounts for the following plan year. Unlike carryovers, participants cannot waive or decline coverage during a grace period.
Second, an employer can allow participants to carry over all unused amounts for plan years ending in 2020 and 2021. Accordingly, unused FSA amounts as of the end of the 2020 plan year may be carried over and used for qualifying medical and dependent care expenses through the end of the 2021 plan year, and unused FSA amounts as of the end of the 2021 plan year may be carried over and used for qualifying medical and dependent care expenses through the end of the 2022 plan year. Employers that use health savings accounts may find the carryover option more flexible, since IRS rules allow participants to waive carryovers but not grace periods.
The grace period and carryover relief provisions are optional. Employers may adopt the provisions for all FSAs, for healthcare FSAs but not dependent care FSAs, and for dependent care FSAs but not healthcare FSAs. Employers may also elect to apply the provisions for the 2020 plan year but not the 2021 plan year.
Extension for Reimbursements to Terminated Participants
For a participant who terminates participation in a cafeteria plan in the 2020 or 2021 calendar year, the CAA allows FSAs to reimburse the participant for expenses incurred through the end of the plan year in which the participant ceases participation. The end of the plan year includes any grace period as extended by the CAA.
Mid-Year Election Changes
The CAA allows employers to permit participants to change FSA elections for plan years ending in 2021 at any time in the 2021 plan year regardless of whether otherwise permissible changes in status events occur. The new elections are subject to the maximum dollar limitations on FSA contributions. Participants who have elected their contribution amounts for the 2021 plan year should consider the effect of any new grace periods or carryovers on their elections. Refunds of previously contributed amounts continue to be prohibited. Employers may wish to limit the change period to a specific time during the 2021 plan year so as to reduce the administrative burden.
Liberalization of Dependent Care Aging Out Rules
The CAA allows employers to increase the maximum age of a dependent for permissible dependent care FSA expenses from 13 to 14. The increase applies to a participant who has one or more dependents who attain age 13 during the last plan year whose enrollment period ended on or before January 31, 2020. Accordingly, for a calendar year plan, the increase applies to a participant with a dependent who attained age 13 during calendar year 2020. The CAA provides two options. First, the plan can reimburse expenses incurred for the remainder of the plan year after the dependent attains age 13. Second, if there are unused amounts at the end of the 2020 plan year, those amounts may be used in the 2021 plan year for a dependent who will attain or has attained age 13, but not after the dependent attains age 14.
Employers that adopt any of the optional provisions under the CAA must amend their cafeteria plans by the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective. For example, an employer that adopts the carryover for a healthcare FSA for the plan year ending December 31, 2021 must adopt the amendment by December 31, 2022.
It does not appear that the CAA changes the rules for adding a new grace period or replacing a grace period with a carryover. An employer must adopt a grace period by the end of the plan year to which it applies. Accordingly, for the 2020 plan year, the grace period extension appears to apply only to those FSAs that already have a grace period.