Since the beginning of the COVID-19 emergency in March, the federal government has released several modifications to healthcare benefits to assist American companies and workers handle the economic stress, such as the CARES Act. In May, two additional notices were published, allowing mid-year election changes for health Flexible Spending Accounts (FSAs) and Dependent Care Assistance Programs (DCAPs).
Notices 2020-39 and 2020-33 provide more flexibility in grace periods for both types of accounts and increase the maximum annual carryover amount for health FSAs. Learn more below about recent updates for Flexible Spending Accounts.
Cafeteria Plan, Health FSA and DCAP Elections
COVID-19 Guidance for Mid-Year Elections
Outlined in Notice 2020-39, employers can amend health FSA and Dependent Care FSA plans that begin in 2020 to allow for changes to annual elections or allow new elections; employers have the ability to limit how many changes are allowed.
Plans may be amended to allow participants to do the following:
- Make a new election, even if the employee had previously declined
- Revoke an existing election and make a new election in a different health coverage offered by the employer (with written intent from the employee)
- Revoke an existing election and make a new election in a plan not offered by the employer
- Increase, decrease, make a new election or revoke an existing election for a health FSA
- Increase, decrease, make a new election or revoke an existing election for a Dependent Care FSA (DCAP)
Mid-year elections cannot be retroactive to allow for refunds. If a participant had already contributed $1,000 to their FSA, they may decrease their election to that amount; they are not allowed to decrease the election to less than $1,000 and get a refund.
Prior to this guidance, employees could only change their health FSA elections due to specific “qualified” life events; these include an update in marital status, addition or loss of a dependent, change in employment status or becoming eligible for Medicare or Medicaid. For Dependent Care FSAs, participants could update elections based on changes to care costs and care provider closings, among other reasons.
Extended Grace Period for Health FSAs and DCAP
A grace period is a pre-defined timeframe after the plan year ends that enables participants to spend down any remaining balance from the previous year. For plans on the calendar year (January 1 – December 31), grace periods often end March 15 of the following year.
COVID-19 Grace Period Extension
Employers may now amend their plans to allow for beneficiaries to use their unused health FSA, Dependent Care FSA, or Limited Purpose FSA funds. The guidance applies to grace periods ending in 2020 or a plan year ending in 2020, allowing the spending extension to end December 31, 2020. If a plan does not have a grace period but the plan year ends in 2020, the employer may allow participants to apply the unused amount through December 31, 2020.
Important Note: An employer that chooses to adopt the grace period extension will cause an employee to be ineligible for an HSA through at least December 31, 2020.
Deadline for Plan Amendments
Employers are not required to adopt these changes. In order to allow mid-year elections and extend grace periods for 2020, employers have until December 31, 2021 to file a plan amendment.
Health FSA Carryover
In Notice 2020-33, the IRS also updated guidelines for FSA carryover. Since 2013, health FSA participants could carryover a maximum of $500 in unused funds to the following year. Going forward, the maximum carryover amount will be indexed to 20 percent of the annual maximum election. For 2020 FSA plan years, participants may carryover a maximum of $550 (20 percent of $2,750) to the next year.
If the employer chooses to adopt the carryover increase, a plan amendment is required by December 31, 2021.
Updated Eligible Healthcare Expenses
Another significant update is the expansion of eligible healthcare expenses. Under the Affordable Care Act (ACA), over-the-counter (OTC) medications were not considered eligible expenses unless the participant had a prescription. The new updates now allow OTC medications as eligible without a prescription. In addition, menstrual care products have also been added to the eligible expenses list.
Employers must amend their plan in order to allow for the new eligible expenses.
This summary was written with helpful insights provided by the Employers Council on Flexible Compensation (ECFC), the Society of Professional Benefit Administrators (SPBA), and Alston & Bird.