Many organizations are abuzz with excitement over the recent Consolidated Appropriations Act, 2021 (the “Act”), which provides temporary new relief for flexible spending accounts (FSAs). With the legislation, organizations can allow their people increased flexibility with higher carryover limits, longer grace periods and broader election changes, among other provisions.
All of the new plan changes are optional – organizations have a choice of whether or not to adopt them. You may be wondering whether to make any – or all – of these changes for your people.
To help you, we’re sharing five questions for you to consider when evaluating your options. These will illustrate how each plan change may affect your people and your overall benefits package.
What do the new rule changes do? a brief recap
The Act includes five major optional plan changes to FSAs. These are effective immediately and include:
- More generous carryover features. Plans can allow carryover of all unused health FSA and dependent care FSA (DCFSA) funds from plan years ending in 2020 into 2021 and from plan years ending in 2021 into 2022. This would be an increase from the standard carryover limit of $500 (or $550 from 2020 into 2021, if previous federal relief was adopted) for health FSAs and a new temporary provision for DCFSAs.
- Extended grace periods. Grace periods can be extended to 12 months after the end of the plan year for both health FSAs and DCFSAs, up from the traditional two-and- a-half months. An important item to note is that an FSA and/or DCFSA cannot have both a carryover feature and a grace period; they must choose one or neither per plan.
- Broader allowances for election changes. With this provision, employees may make election changes for both FSAs and DCFSAs without regard to change in status rules. This provision extends the similar relief granted through IRS Notice 2020-29 into 2021. Annual limits still apply.
- New spend-down provisions. DCFSAs already have a spend-down provision that allows people who have been terminated to use any contributed amounts for future dependent care expenses. Now, this provision can apply to health FSAs as well.
- DCFSA age limit increase. Dependents whose expenses would be covered by a DCFSA to age 13, who aged out during 2020 and 2021 plan years, may use any funds for those plan years on expenses through to age 14. This applies only if the employee elected the DCFSA before January 31, 2020 and has an unused balance in the account.
These provisions are to be adopted via plan amendment, which can apply retroactively. Plans have until December 31, 2021 to formally adopt the necessary amendments.
1. what were your people's biggest pain points in 2020?
These provisions are designed to offer relief to the millions of Americans who weren’t able to use their health and dependent care FSA benefits as they anticipated. Many put off medical procedures, avoided doctors’ offices, did not require dependent care or made enrollment choices they may regret due to pandemic uncertainty. With these provisions, your organization can help remedy some of those issues.
Which plan changes you adopt should correspond to the needs of your people. If you know many of your employees put off medical care or were unable to use their DCFSAs due to the cancellation of daycare services and summer camps, for example, consider offering unlimited carryover or the extended grace period.
Nearly everyone could benefit from the allowance of election changes without the occurrence of a standard qualifying change in status. Many of your people may have chosen not to enroll in an FSA plan because of uncertainty related to COVID-19, or chose an election amount that no longer reflects their needs. Extending this increased flexibility allows for greater value during a time full of unknowns.
If you’re unsure where your people could use relief, you can consider surveying or interviewing them about their pandemic-related challenges. The answers should give you a good idea of where you can add the most value with these plan changes.
2. do you offer an Hsa benefit as well, or do any of your people contribute to an hsa?
One important consideration is how your adopted plan changes affect the rest of your benefits offerings. This is particularly important when it comes to health savings accounts (HSAs).
If your plan chooses to extend your grace period to the full 12 months allowed by the Act, you should know employees covered under a standard (i.e., non-limited purpose or post-deductible) FSA during the grace period cannot contribute or receive contributions to an HSA while the grace period is in effect.
This is not the case with a carryover. Tying the carryover to an employee’s HSA-eligible plan will make any carryover funds in the FSA HSA-compatible. This will allow you to continue offering HSA contributions as a benefit and your people to contribute to their own savings.
If you offer an HSA benefit or have many employees who use an HSA, consider adopting unlimited carryover rather than a grace period. In addition to allowing continued contribution to HSAs, carryovers allow people to spend their funds at their leisure rather than rush to meet a deadline.
3. do your people often have high account balances at the end of the plan year?
Many people have funds in their FSA at the end of each plan year. The average amount left over is nearly $200, but internal HealthEquity data suggests that the COVID-19 pandemic has meant much higher end-of-year balances – more than $500 million in total.
If this is the case with your people – and particularly if it’s been the case in many years – the unlimited carryover or extended grace period provisions are fitting.
This will allow your people to get the full benefit of their FSA funds within a more generous timetable. That’s particularly true for the coming year, during which many will likely seek out the medical care or dependent care services they could not use in 2020.
As mentioned in question two there are many reasons to consider using the carryover option rather than the extended grace period. Carryovers permit continued contributions to HSAs, while grace periods prevent this. Grace periods may also encourage hasty or frivolous spending, as people attempt to avoid losing access to their funds. With a carryover, your people have time to use all their funds in the most effective ways without fear of a deadline.
4. are you planning on making any layoffs this plan year?
Due to the economic contraction caused by the COVID-19 pandemic, many businesses have struggled financially. Some have come to the difficult decision to implement layoffs and may need to continue to do so.
If your organization is contemplating layoffs in the coming year, you likely want to do the best you can by those affected. One way to do so is by implementing the provision allowing people to spend down their remaining balances in health and dependent care FSAs following termination.
This spend-down feature is already permitted in DCFSAs. If you do not have it, however, you may consider adopting it.
Spend-downs are now also permitted in health FSAs. This provision gives your departing people a little extra peace of mind as they navigate the changes termination brings.
With both provisions, your people can take care of their health and dependent care needs for their families.
5. did any of your people have dependents who aged out of dcfsa eligibility last year?
In addition to the diminished need for childcare during the pandemic, many families struggled with children who aged out of eligibility for DCFSA funds.
Under standard regulations, an employee cannot use DCFSA funds once their dependent turns 13. Because many children turned 13 during the pandemic without the ability to use those funds, the Act permits DCFSA funds to cover dependents up to 14 in 2020 and 2021.
To be covered by this provision, employees must have been enrolled in a DCFSA as of January 31, 2020 and have unused balances.
Those who were affected would be grateful for the ability to use the funds they contributed and received in good faith. If any of your people qualify for this relief, you should consider adopting the plan change.
healthequity can help
If you need further help in thinking through any plan chances, rely on HealthEquity. We can work with your organization, your benefits advisors and any other individuals to craft a benefits package that fits your unique needs. We can also draft the necessary plan amendments for your desired changes.
Get started now by learning more about the FSA rule changes with our free, on-demand webinar. In this recording, you’ll learn about each FSA provision and how it might benefit your organization, as well as how to get started making changes.