Flexibility for Health FSAs and Dependent Care

The IRS has released guidance on temporary special rules under the Taxpayer Certainty and Disaster Relief Act of 2020 for health flexible spending arrangements (FSAs) and dependent care assistance programs allowed in response to the impact from COVID-19. These plans now have additional discretion in 2021 and 2022 to adjust their programs to help employees better meet the unanticipated consequences of the public health emergency. In addition, the guidance provides relief to cafeteria plans to implement the expansion under the CARES Act of allowed expenses for health FSAs and health reimbursement arrangements to include over-the-counter drugs without prescriptions and menstrual care products.

As a result of COVID-19, participating employees are more likely to have unused health FSA amounts or dependent care assistance program amounts at the end of 2020 and 2021. 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. Typically, account funds that are not spent by the employee within the plan year, subject to limited grace periods or certain carryover amounts, are forfeited.

Flexibility granted. Flexibility has been granted for employers in the following areas related to health FSAs and dependent care assistance programs, including:

· the carryover of unused amounts from the 2020 and 2021 plan years,

· extend the permissible period for incurring claims for plan years ending in 2020 and 2021,

· adopt a special rule regarding post-termination reimbursements from health FSAs,

· 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.

Employers are given 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. Employers that choose to implement any or all of these changes may implement them immediately and retroactively.

If you would like more information on the temporary rules and relief granted for health and dependent care flexible spending accounts, please contact the Crosslin tax team at (615) 320-5500. We are here to help!