In December 2020, Congress passed the Consolidated Appropriations Act, 2021 (CAA), a $900 billion COVID stimulus bill. The legislation was aimed at helping Americans cope with pandemic-related challenges. Along with stimulus payments and other financial provisions, the bill also included modified carryover and dependent rules for Dependent Care Assistance Plan (DCAP) benefits, spend-down for health Flexible Spending Accounts (FSAs), election changes, and other updates.
Traditionally, DCAP benefits have not included a carryover provision. However, with millions of working people at home and children out of day care and before- and after-school care programs, many were left with a hefty unused sum in their DCAP benefits.
Congress and other federal agencies have worked to provide relief for people affected by the healthcare crisis. In March 2020, Congress passed the CARES Act and the Internal Revenue Service (IRS) increased the maximum carryover amounts for health FSAs. IRS Notice 2021-15 also provided greater flexibility for both FSAs and DCAPs in terms of carryover, extensions, mid-year elections and more.
Health FSA and DCAP Updates in New Stimulus Bill
CAA enables – but does not require – employers to do the following:
- Health FSA and DCAP carryover: Allow health FSA and DCAP plans to carry over all unused amounts from 2020 to 2021 and from 2021 to 2022
- Extended grace period: Provide 12-month grace period for unused benefits or contributions in health and dependent care FSAs for plan years ending in 2020 or 2021
- Health FSA spend-down: Permit health FSA participants who terminate during the 2020 or 2021 plan year to spend down any unused balance through the end of the plan year in which the termination occurred, including any grace period
- Update DCAP age limits: Extend the maximum age from 12 to 13 for dependent care FSAs for the 2020 plan year and for unused amounts from the 2020 plan year carried over into the 2021 plan year
- Election amount changes: Allow changes to election amounts for health and dependent care FSAs for plan years ending in 2021 without a corresponding qualifying life event (change to marital status, birth/adoption or death of a dependent, change in employment status, etc.)
Plan Amendments Required
These changes are not mandatory and employers may choose to adopt some changes without having to adopt them all.
The deadline to make amendments is the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective. In other words, to adopt the changes for a plan year starting January 1, 2020, you must amend your plan by December 31, 2021, or for one starting January 1, 2021, by December 31, 2022. Plan docs may be changed retroactively so long as they are consistent with the relief provided in this regulation.
Adopting these carryover provisions may affect HSA eligibility. Before implementing these changes, it is recommended that you consult a qualified benefits counsel.
This article was written with guidance from articles published by Alston & Bird LLP and ECFC.
DataPath is a leading developer of cloud-based FSA administration solutions and is an active member of ECFC.