In response to the COVID-19 pandemic, Congress enacted temporary special rules for health flexible spending arrangements (FSAs) and dependent care assistance programs under Sec. 125 cafeteria plans. The new rules were put in place as part of the Consolidated Appropriations Act, 2021 (CCA), P.L. 116-260, enacted in December 2020. The IRS has now provided these plans with more discretion in 2021 and 2022 to make adjustments to help employees meet the unanticipated consequences of the public health emergency (Notice 2021-15). The IRS anticipates that, because of the pandemic, employees are more likely to have unused health FSA amounts or dependent care assistance program amounts at the end of 2020 and 2021.
The changes enacted in the CCA allow flexibility for carryovers of unused amounts from the 2020 and 2021 plan years; extend the permissible grace period for plan years ending in 2020 and 2021; provide a special rule regarding post-termination reimbursements from health FSAs; provide a special carryover rule for dependent care assistance programs when a dependent ages out during the pandemic; and allow certain midyear election changes for health FSAs and dependent care assistance programs for plan years ending in 2021.
Notice 2021-15 permits employees who are eligible to make salary reduction contributions under a cafeteria plan to make a new election prospectively if the employee initially declined to elect employer-sponsored health coverage; revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer prospectively; and revoke an existing election prospectively, as long as the employee attests in writing that he or she is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer.
The notice also provides relief for the effective date of amendments to Sec. 125 cafeteria plans to implement the expansion under the Coronavirus Aid, Relief, and Economic Security (CARES) Act, P.L. 116-136, which allowed expenses for health FSAs and health reimbursement arrangements to include over-the-counter drugs without prescriptions and menstrual care products. The rules allow those expenses to be reimbursed for any period beginning on or after Jan. 1, 2020, without disqualifying the plans.
— Sally P. Schreiber, J.D., (Sally.Schreiber@aicpa-cima.com) is a JofA senior editor.