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New Law Provides Additional Flexibility for Health FSAs And Dependent Care Assistance Programs

On February 18, 2021, The Internal Revenue Service provided greater flexibility, to employee benefit plans offering health flexible spending arrangements (FSAs) or dependent care assistance programs via Notice 2021-15, due to the pandemic. The Notice 2021-15, provides additional mid-year election change relief for Section 125 cafeteria plans for plan years ending in 2021. It also clarifies the application of temporary special rules for health and dependent care flexible spending arrangements (FSAs). Under the COVID-related Taxpayer Certainty and Disaster Tax Relief Act of 2020, 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. Prior guidance only provided flexibility to employers 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.

Notice 2021-15 provides flexibility for employers in the following areas related to health FSAs and dependent care assistance programs:

  • Provides flexibility for the carryover of unused amounts from the 2020 and 2021 plan years;
  • Provides flexibility to extend the permissible period for incurring claims for plan years ending in 2020 and 2021;
  • Provides flexibility to adopt a special rule regarding post-termination reimbursements from health FSAs;
  • Provides flexibility for 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
  • Allows certain mid-year election changes for health FSAs and dependent care assistance programs for plan years ending in 2021.

Next Steps for Employers

In accordance with the Taxpayer Certainty and Disaster Tax Relief Act of 2020, 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. Employers who take advantage of these flexibilities will be required to amend their Section 125 cafeteria plan to incorporate the changes. The amendment may be retroactive as along as it is adopted no later than the last day of the calendar year following the year in which the amendment is effective.

Employers are encouraged to review additional information from the IRS and consult with their tax professional and/or plan administrators.

HR Works, Inc., headquartered at 200 WillowBrook Office Park in Fairport (Rochester), New York, with an office in East Syracuse, is a human resource management outsourcing and consulting firm serving clients throughout the United States. HR Works provides scalable strategic human resource management and consulting services, including: affirmative action programs; benefits administration outsourcing; HRIS self-service technology; full-time, part-time and interim on-site HR managers; HR audits; legally reviewed employee handbooks and supervisor manuals; talent management and recruiting services; and training of managers and HR professionals.