Important Legislative Changes Impacting FSAs and DCAs
Just before the end of the year and with many of the COVID-related provisions about to or having already expired, the Consolidated Appropriations Act of 2021 was passed. This legislation includes the COVID-Related Tax Relief Act of 2020.
The regulation aims to provide increased flexibility for Healthcare Flexible Spending Accounts (Healthcare FSAs) and Dependent Care Accounts (DCAs) for the calendar years 2020 through 2022.
Below is a brief overview of the provisions and the requirements involved in implementing these changes.
Before digging in, note that these changes are not required. The employer can decide, which, if any, provisions to implement. Employers wishing to adopt these provisions will need to modify their Section 125 Plan document.
What is changing?
Extended Grace Period
For plan years ending in 2020 and 2021, the grace period for Healthcare FSA and DCA funds may be extended to 12 months.
All unused funds in Healthcare FSAs and DCAs may be carried over to 2021 (from plan year 2020) and 2022 (from plan year 2021). There is no carryover maximum.
For plan years ending in 2021, employees may modify their Healthcare FSA or DCA elections on a prospective basis at any time during the year. No qualifying event is required.
DCA Age Increase
Previously, dependents could be covered under a DCA until age 13. Through the end of the 2021 plan year, employers may now allow DCA reimbursements for children who turned 14 during the 2020 plan year.
Reimbursements for Non-Active Participants
Employees who cease participation in a Health FSA during 2020 or 2021 (for example, due to termination of employment) may continue to receive reimbursements from unused balances through the end of the plan year in which such participation ceased (including any grace period).
Before implementing, consider the advantages and disadvantages.
We strive to help employers succeed in benefits management. If you need guidance understanding the pros and cons to each provision, we’d love to partner with you as a resource.
If American Fidelity is your Section 125 provider, you should determine whether you plan to adopt these provisions. Your dedicated representative is available to help facilitate next steps.
This blog is up to date as of January 2021 and has not been updated for changes in the law, administration or current events.