A number of changes in recent months have given employees extra benefits and flexibility when it comes to utilizing Flexible Spending Accounts (FSAs) and Health Savings Accounts (HSAs). The newly signed American Rescue Plan Act of 2021 raised FSA contribution limits and the COVID relief bill signed in late 2020 gave employees additional flexibility in the use of funds and making election changes.
The IRS recently released additional guidance, in response to the COVID-19 pandemic, that allows employees to make changes to their health plans outside of the traditional open enrollment period.
The COVID relief bill signed into law at the end of 2020 changed the tax law. The law ordinarily requires employees to make irrevocable plan choices before the first day of the plan year; later changes are normally permitted only under certain circumstances, such as a change in employee status.
However, 2020 was an abnormal year. For example, stay-at-home orders left employees with unused money in their dependent care FSAs because they unexpectedly did not have to pay for child daycare.
The temporary changes
Recognizing the current extraordinary situation, the combination of new regulations make several temporary changes:
- The ARPA increases the dependent care flexible spending account limit from $5,000 to $10,500 for the 2021 tax year only.
- Employers can permit employees to carry over unused funds from their 2020 FSAs to 2021, and from 2021 to 2022. Ordinarily, these accounts have a “use it or lose it” rule under which the employee forfeits unused funds at the end of the year.
- If an employee contributed $5,000 to a dependent care FSA in 2020 but used only $3,000 because he or she worked from home, they can now carry the remaining $2,000 forward for use in 2021.
- Alternatively, employers can extend the grace period for employees to spend unused FSA funds. Normally, employees have two and a half months from the end of the plan year to spend the money on qualifying expenses. The temporary rules permit employers to give them up to 12 months to do it.
- Employers can allow certain employees to use dependent care FSA funds for care of children up to age 14. The normal cut-off age is 13.
- Employers may allow employees to change their future contributions to 2021 FSAs mid-year, something that is ordinarily prohibited.
- Employers may also permit employees to make mid-year health plan changes. Employees who did not enroll in the employer’s health plan during open enrollment will be able to do so.
- Employees can change available plans, or they can drop coverage entirely if they can show that they have replacement coverage such as through a spouse’s employer.
- If an employee changes from a high-deductible health plan to one with copayments or lower deductibles (or vice versa), employers can also permit them to switch mid-year between contributing to an HSA or an FSA. By law, an HSA must be coupled with an HDHP.
- Lastly, they can allow employees who stop contributing to a health care FSA mid-year to receive reimbursements through the end of the plan year.
It is important to know that:
- The laws do not require employers to make these changes.
- The changes expire for plan years starting in 2022 and later.
The pandemic has been difficult for employers and employees alike. These temporary changes will make it a little easier for both to cope.