The Coronavirus Aid, Relief, and Economic Security Act of 2020 (CARES Act), the Consolidated Appropriations Act, 2021 (CAA) and now the American Rescue Plan Act of 2021 (ARPA) each include many provisions that affect retirement, welfare and fringe benefit programs.
CAA significantly loosened the use-it or lose-it rules that normally apply to health care and dependent care flexible spending accounts (FSAs). However, various questions remained unanswered with respect to who can take advantage of the new relief and how the relief is applied. Thankfully, the Internal Revenue Service issued Notice 2021-15, which answered many of these questions.
The Notice clarified, for example, that any FSA can take advantage of the CAA relief by retroactively amending the plan to allow either a grace period or a carryover feature and to allow unused amounts remaining at the end of the 2020 plan year to be used in 2021 and to allow unused amounts remaining at the end of the 2021 plan year to be used in 2022. (Amounts still cannot be mixed of course; that is, one cannot use health care FSA balances to reimburse dependent care expenses and vice versa.)
Reflecting the changes made by CAA, the Notice further provides that, in general (and assuming a calendar year plan year) –
- Both cafeteria (or Section 125) plans and FSAs can allow prospective mid-year 2021 election changes.
- In the case of dependent care FSAs, a new provision (if adopted by the plan) allows 2020 plan year contributions to be used to reimburse expenses incurred in 2020 or 2021 with respect to dependents who attain age 13 during the 2020 or 2021 plan year. The expenses must be incurred before the child turns age 14 or, if earlier, the end of the 2021 plan year.
- In the case of health care FSAs, participants who terminated in 2020 or 2021 can (but are not required to) be offered the ability to continue to access their health care FSAs for expenses incurred after termination and through the end of the plan year or grace period, if any, without having to elect COBRA (commonly referred to as a spend down feature).
Employers generally have a great deal of flexibility in enacting these changes and can offer some or all of them or can limit election changes in certain ways, provided applicable nondiscrimination requirements are met. Amendments adopting FSA relief must be adopted by the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective. So for plans that operate on a calendar year basis, amendments for carryovers or extended grace periods from 2020 to 2021 and other changes generally must be adopted by December 31, 2021, while changes for carryovers and grace periods from 2021 to 2022 generally must be adopted by December 31, 2022.
The American Rescue Plan Act (ARPA), signed into law on March 11, raises pretax contribution limits for dependent care flexible spending accounts (DC-FSAs) for calendar year 2021. It also increases the value of the dependent care tax credit for 2021.
The new DC-FSA annual limits for pretax contributions increases to $10,500 (up from $5,000) for single taxpayers and married couples filing jointly, and to $5,250 (up from $2,500) for married individuals filing separately. The higher limits apply to the plan year beginning after Dec. 31, 2020 and before Jan. 1, 2022.
The contribution limit for health care FSAs remained unchanged at $2,750.
Reviewing the Basics: Dependent Care FSAs and Tax Credits
A dependent care FSA—also referred to as an Internal Revenue Code Section 129 dependent care assistance program(DCAP)—is a pretax benefit account used to pay for services such as day care, preschool, summer camps and before- or after-school programs. Funds may be used for expenses relating to children who are under the age of 13 or incapable of self-care and who live with the FSA holder more than half the year.
Elder care may be eligible for reimbursement with a dependent care FSA if the adult lives with the FSA holder at least eight hours of the day and is claimed as a dependent on the FSA holder’s federal tax return.
Employers can also choose to contribute to employees’ dependent care FSAs. However, the combined employer and employee contributions to a dependent care FSA cannot exceed the IRS limits.
Pandemic-Related Relief
Congress and the IRS have provided other DC-FSA relief this year to help meet caregivers’ needs during the pandemic, and employers should consider these changes as well as the new contribution limits when adjusting plans they sponsor. For instance:
The Consolidated Appropriations Act, 2021 (CAA), signed into law at the end of 2020, allows employers that sponsor health or dependent care FSAs to permit participants to roll over all unused amounts in these accounts from 2020 to 2021 and from 2021 to 2022.
IRS Notice 2021-15, issued in March, clarifies that employers may extend the dependent care FSA claims period for a dependent who “ages out” by turning 13 years old during the COVID-19 public health emergency. The limiting age remains at 14 for the 2021 plan year, but this relief only applies to dependent care FSA funds that remained unspent at the end of the 2020 plan year.
| Temporary Provision/Allowance | FSA Plan Types Applied To |
| Unlimited Carryover (no cap) | Healthcare FSA (general/limited purpose) Dependent Care FSA Applied to plans with Carryover already in place, or to those with nothing in place for year-end processing (no carryover, no grace period). |
| Extended Grace Period to 12 months | Healthcare FSA (general/limited purpose) Dependent Care FSA Applied to plans with Grace Period already in place. |
| Unrestricted Midyear Election Changes | Healthcare FSA (general/limited purpose) Dependent Care FSA |
| Post-Termination Reimbursements | Healthcare FSA (general/limited purpose) |
| Dependent Age Limit Increased to 14 | Dependent Care FSA |
| *Plans that run off-calendar years will need to make sure that contributions are set in such a way as to not exceed the new $10,500 cap for the 2021 calendar year. |
