U.S. COVID-19: Ring in the New Year with COVID-19 Relief for Health and Dependent Care Flexible Spending Accounts
January 12, 2021
Authored by: Sarah Bhagwandin, Steve Evans and Serena Yee
Thanks to the Consolidated Appropriations Act, 2021 (the “Act”), employers with health flexible spending accounts (“HFSAs”) and dependent care flexible spending accounts (“DFSAs”) may adopt temporary liberalized rules to help reduce employees’ forfeitures during the pandemic. The Act expands upon some of the prior relief provided under IRS Notice 2020-29 and temporarily relaxes certain standard HFSA and DFSA rules for the 2021 and 2022 Plan Years.
Employers will want to work through the new relief, determine what provisions to adopt, and communicate any changes in short order.
- Increased Carry-Over Amounts
- A cafeteria plan may allow for the carry-over of up to 100% of the unused HFSA and DFSA balances at the end of the 2020 and/or 2021 Plan Year(s) to the next Plan Year. Under the standard cafeteria plan rules, carry-overs are limited only to HFSAs.
- Carried over amounts do not reduce the maximum annual HFSA or DFSA benefit amount a participant may elect for a Plan Year.
- Extended Grace Period for Incurring Claims
- Generally, a plan may allow a grace period of up to 2 ½ months following the end of a Plan Year during which participants can incur additional expenses to be paid or reimbursed from HFSA and DFSA amounts remaining at the end of the immediately preceding plan year. IRS Notice 2020-29 allowed employers to extend any HFSA and DFSA grace period ending in 2020 to December 31, 2020.
- The Act permits employers to adopt a