This year, employers have been worried about the impending forfeiture of their employees’ flexible spending account dollars given that many employees couldn’t use those dollars throughout much of the year due to the closure of day care facilities and summer camps and the postponement of health care services as a result of the COVID pandemic. The Taxpayer Certainty and Disaster Tax Relief Act of 2020, which was included in the year-end budget and COVID relief package signed by President Trump on December 27, 2020, includes some welcome (albeit late) relief for flexible spending accounts (FSAs).
There are several new rules available for FSAs:
The same rule will apply for plan years ending in 2021 – unused balances at year-end 2021 can be carried over (uncapped) into 2022 or available for a 12-month grace period in 2022.
Importantly, the new law did not change how FSAs interact with health savings account (HSA) eligibility, so employers will want to carefully consider how the implementation of these rules might impact an employee’s eligibility for a HSA in either 2021 or 2022.
The normal rule for dependent care FSAs is that expenses incurred after a child turns age 13 are ineligible for reimbursement.
The new law provides that if a participant enrolled in a dependent care FSA had a child that turned age 13 in the 2020 plan year (more specifically, in the plan year for which the open enrollment period ended on or before January 31, 2020), then the participant may be reimbursed for expenses incurred after the child’s 13th birthday for the remainder of that plan year, or if there is an unused balance at plan year end, in the following year until the child turns age 14.
None of these changes are mandatory; an employer may choose to implement some, all, or none of them. Amendments to FSA plans reflecting the change must be made by the end of the plan year after the year the change is effective.