Relief for Flexible Spending Account Plans: Considerations For Employers

Thanks to the CARES Act and other regulatory updates, employers that offer cafeteria plans and flexible spending accounts can allow their associates a few temporary relief measures. These options were available to employers starting with plan year 2020, and plan year 2021 is the last chance to take advantage of them.

What are the options, and what’s involved for companies that opt in?

Employers can choose to allow one of the following:

• Extend the grace period for FSA claims after the end of the year from two and a half months to 12 months.
  • This is available for amounts unused as of the last day of plan years ending in 2021.

-OR-

• Carry forward the full unused balance of a health FSA or dependent care FSA.
  • This is available for amounts unused as of the last day of plan years ending in 2021.

Employers can also choose to allow any or all of the following:

• Reimburse health FSA expenses incurred during the applicable plan year, but after an employee’s termination of coverage.
  • This is available for employees who terminated coverage in 2020 or 2021.
• Reimburse dependent care expenses for a child up to age 14.
  • This is available, subject to certain complexities, for expenses incurred by a dependent 13 years old or younger in plan years ending in 2020 and 2021.
• Increase the maximum annual tax-favored reimbursement limit under dependent care assistance plans up to $10,500.
  • This is available for plan year 2021 only.

In general, employers who implement any of these changes for a 2021 calendar year plan must amend relevant plan documents by the end of 2022. Employers with non-calendar year plans must amend their documents within one year after their plan year ends.

Keep in mind: Adopting these relief measures for your employees will affect plan forfeitures. If your company has historically relied on forfeited funds to offset plan expenses, know that access to these funds would be delayed by a grace period extension and the amounts may be reduced if you allow full-balance rollover.

Education is key: Be prepared to educate your employees on any changes you allow. For example:

• Unused balances that roll from 2021 into 2022 still must be spent by the end of plan year 2022. Employees who do not anticipate being able to spend it all may adjust their 2022 contributions downward to avoid an excess of funds.
• If your company allowed the temporary maximum contribution of $10,500 to dependent care accounts and you allow the full-balance rollover, make sure employees know the maximum dependent care plan reimbursement limit returns to $5,000 in 2022. Any expenses reimbursed over this limit in 2022 will be taxable to the employee. If you have employees carrying large balances into the 2022 tax year, they should be advised of this liability to avoid surprises when they file personal tax returns.

Our team is here to answer questions about these options, including the benefits to employees and impact on benefits plan documents. Email us at health@pnfp.com.

---