After several delays, the Consolidated Appropriations Act, 2021 (the "Act") was signed into law on December 27, 2020. Although the Act primarily addresses coronavirus emergency response and relief and appropriations through September 30, 2021, it also contains several provisions of interest for employers that sponsor benefit plans, including temporary flexibility for health care and dependent care flexible spending accounts (FSAs), changes to retirement plan provisions, and certain health care plan changes related to so-called "surprise billing". The following summarizes the provisions of the Act that affect health care and dependent care FSAs.
In the context of health care and dependent care FSAs, the following summarizes the most material provisions of the Act:
- Changes to Elections. For plan years ending in 2021, a cafeteria plan can permit employees to change the amount of their health FSA and dependent care FSA contribution elections, even if the employee has not had a 'change in status,' as long as the contributions do not exceed applicable dollar limitations otherwise applicable to such accounts. This generally reflects an extension of similar relief that was provided for plan years ending in 2020 under Notice 2020-29 (see our prior post here). Note that the Act applies only to amounts contributed to FSA accounts and not to any other types of elections, including the election of health coverage.
- Carryover of Unused Amounts. A health care FSA may allow for certain limited unused amounts to be carried over from one plan year to the next, which carryover amounts can be used to pay expenses incurred in the carryover year. The carryover amounts do not count against the limits that would otherwise apply to reimbursements from health care FSAs for the carryover year. Absent the application of the Act, the amount that can be carried over is limited to $550 (for 2021) and would not apply to dependent care FSAs. In addition, a plan cannot provide for both a carryover provision and a grace period (discussed below). Notwithstanding these typical limitations, the Act provides that any unused amounts can be carried over for the 2020 and 2021 plan years under both health care FSAs and dependent care FSA (applying rules similar to those that apply to health care FSAs).
- Extension of Grace Period. A cafeteria plan may provide for a grace period (but, as noted above, not both a grace period and a carryover provision) during which unused amounts in an health care FSA or dependent care FSA from the prior plan year can be used to pay applicable expenses incurred in the next plan year. The "normal" grace period is limited to 2-1/2 months following the end of the prior plan year. For plan years ending in 2020 and 2021, however, the grace period may be extended for up to 12 months after the end of the prior plan year.
- Extended Period for Reimbursements under a Health Care FSA. Despite rules that would normally limit the time frame for reimbursements from a health FSA to the period during which the individual was covered by the plan (putting aside a COBRA election), a plan may permit an employee who ceases participating in a health FSA during 2021 or 2021 to continue receiving reimbursements through the end of the plan year in which his or her participation ceased, including any grace period. This provision does not apply to dependent care FSAs.
Typically, cafeteria plans must be amended prospectively to reflect changes, but the Act permits employers to retroactively amend their cafeteria plans to reflect desired changes. Retroactive amendments must be adopted by the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective and the plan must be operated in accordance with the amendment terms beginning with the date the amendment is effective. For plan sponsors with calendar year plans that want to make amendments affecting the 2020 plan year, amendments must be made by December 31, 2021 and plan amendments for the 2021 year will need to be made by December 31, 2022.
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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.
