New COVID-19 Relief Bill Allows FSA Rollover, Extends Grace Period
The 2021 Consolidated Appropriations Act (CAA) introduced new optional FSA provisions that grant employees improved account flexibility in the new year—including key updates to health FSA and dependent care FSA funds and claims. Here’s what your team needs to know.
New Legislation Spurs Change
Only a few days before the end of 2020, Congress passed a new coronavirus stimulus bill to address many of the pandemic challenges faced by employers and employees alike. On Dec. 27, 2020, the president signed the bill into law.
While legal experts and HR teams are still digging into the details—the CAA clocks in at 5,000-plus pages—one important takeaway from the bill is added flexibility for flexible spending accounts (FSA) and dependent care FSA funds.
Why Did Congress Adjust FSA Requirements?
Simply put, many FSA and dependent care FSA owners didn’t use their funds as expected in 2020.
For example, it’s common for employees to use FSA funds to pay for childcare services. During the pandemic, countless people worked from home and many opted to watch their children instead of sending them to daycare. Some childcare services were closed for significant portions of the year as well.
Unlike most health savings account (HSA) funds, FSA dollars tend to expire at the end of the calendar or plan year. Thanks to this convergence in conditions, many employees faced losing their contributions for the year until Congress intervened in late December 2020.
Relief Bill Offers Expanded FSA Flexibility
Now, employers are empowered to make 2020 plan year FSAs and dependent care FSAs friendlier for employees in two different ways.
For health FSAs, these include:
- Unused Funds Carryover: Employers can allow the carryover of unused FSA and dependent care FSA funds (with no dollar limit) from a plan year ending in 2020 and/or 2021 to a plan year ending in 2021 and/or 2022.
- Extended Grace Period: Employers can extend the FSA and dependent care grace period to up to 12 months after the end of the plan year for a plan year ending in 2020 and/or 2021. This option allows FSA holders to file a claim much later for an eligible expense in 2020. (Reminder: The typical grace period of coverage indicates an additional two-and-a-half-month timeframe in which FSA owners can incur expenses after the end of the plan year.)
- Post-Termination Reimbursement: Employers can allow employees who stopped participating in an FSA in 2020 or 2021 to continue receiving reimbursements from unused benefits or contributions through the end of the plan year when participation ended.
- Contribution Adjustments: Employers can allow employees to change their FSA contributions for plan years ending in 2021 without the need for a qualifying life event.
What Else Should Employers Know?
It’s essential that employers understand these provisions are optional, though electing to offer them can improve employee morale and help your team make the most of their benefits.
HR can take advantage of this new FSA flexibility under the following conditions:
- They work with their benefits broker to amend the organization’s Section 125 to allow for the updates; and
- If they alert their FSA administrator about the adjustments (so the administrator can change the employer’s plan in its system accordingly).
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