24 Feb IRS Update: Expanded FSA and Dependent Care Flexibility for Employee Benefit Plans
On February 18th, due to the pandemic, the IRS provided greater flexibility to employee benefit plans offering health flexible spending arrangements (FSA) and/or dependent care assistance programs.
Generally, under these plans, an employer allows its employees to set aside a certain amount of pre-tax wages to pay for medical care and dependent care expenses. Amounts spent by the employee are then reimbursed from their designated health FSAs or dependent care assistance programs.
The added flexibility with Notice 2021-15, is in addition to the changes enacted under the COVID-related Taxpayer Certainty and Disaster Tax Relief Act of 2020, which enabled plans to have additional discretion in 2021 and 2020 to adjust their programs to help employees during the pandemic.
Take a quick read of the overview below to ensure you are aware of these changes that may offer a positive impact for your employees.
Moving the Carry Over Goalpost
Resource: Notice 2021-15
As a result of COVID-19, many regular-use medical or dependent care services were lacking accessibility resulting in participating employees being more likely to have unused health FSA amounts or dependent care assistance program amounts at the end of 2020 and 2021.
Notice 2021-15 provides added (FSA / Dependent Care) flexibility for employers to:
- Handle carryover of unused amounts from 2020 and 2021 plan years;
- Extend the permissible period for incurring claims (2020 and 2021 plan years);
- Adopt a special rule regarding post-termination health FSA reimbursements;
- Incorporate 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
- Allow certain mid-year election changes for health FSAs and dependent care assistance programs for plan years ending in 2021.
Prior Guidance (FSA & Dependent Care)
Previously adopted changes provided flexibility 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 care or dependent care expenses. The Taxpayer Certainty and Disaster Tax Relief Act of 2020, signed into law on December 27, 2020, extends and expands flexibility for these arrangements in 2021 and 2022.
The decision to adjust these employee benefit programs is at the discretion of the employer that sponsors the plan.
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.
If you need help in understanding if making these adjustments is right for you, contact one of our Consultants for a more detailed analysis of your current plan offerings.