IRS Provides Additional Flexibility for Health FSAs and Dependent Care Assistance Programs
The IRS recently released Notice 2021-15, allowing 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, plans now have additional discretion in 2021 and 2022 to adjust their programs to help employees respond to unanticipated changes in the availability of certain medical and dependent care due to the pandemic.
Participating employees are more likely to have unused health FSA amounts or dependent care assistance program amounts at the end of 2020 and 2021 as a result of COVID-19. 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 or dependent care expenses. The Taxpayer Certainty and Disaster Tax Relief Act of 2020 provides similar flexibility in 2021 and 2022.
Typically, funds not spent by the employee within the plan year, subject to limited grace periods or certain carryover amounts, are forfeited. In accordance with the Taxpayer Certainty and Disaster Tax Relief Act of 2020, Notice 2021-15 gives employers the option to amend their plans to provide greater flexibility for employees to elect and use these programs during the pandemic without risking the forfeiture of the amounts they have set aside.
For more information, visit TSCPA’s COVID-19 resources page.