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Important Employer Considerations for FSAs in the Consolidated Appropriations Act

EverythingHR Staff | 03/04/2021 | Blog, Featured

Like onions and ogres, the Consolidated Appropriations Act, 2021 signed into law in December has layers – many layers!

One layer that is easy to overlook is the inclusion of several forms of relief for flexible spending accounts (FSAs).  This relief impacts both health and dependent care FSAs and is primarily focused on protecting employees from having to forfeit their remaining 2020 FSA funds based on the rules that normally apply to FSAs under the IRS Code.

The FSA relief provisions need to be considered by all employers that are offering FSA – and surveys indicate that close to 90% of employers do offer them.  They are optional — employers may choose to implement some, all, or none of the relief based on the current terms of an employer’s FSA program and the particular issues facing an employer’s FSA participant population.  It is critical to understand though that, if changes are implemented, plan amendments will be required/

For a detailed overview of the IRS clarifications, please continue to our blog…


IRS Clarifies FSA Relief in Appropriations Law


The Internal Revenue Service (IRS) clarified the effect of the Consolidated Appropriations Act (CAA) on an employee’s latitude to contribute or use funds in a flexible spending account (FSA). The IRS also extended the flexibility it offered last year for cafeteria plan elections in general.

The CAA, enacted on December 27, 2020, expanded on the flexibility the IRS granted earlier in the year to holders of health FSAs and dependent care assistance programs (DCAPs). Employers were given broad discretion to loosen grace period, carryover, and midyear change provisions.

Usually, midyear changes to a cafeteria plan election are permitted only in the case of certain status, cost, or coverage changes specified in the Section 125 regulations. Regarding FSAs in particular, funds must be spent within the calendar year or they are forfeited, except that employers may allow a grace period of up to 2-1/2 months or a carryover of up to $550 into the following year. Carryovers are usually not allowed in a DCAP.


For plan years ending in 2020 or 2021, the CAA allows unlimited amounts of unused FSA benefits or contributions to be carried over to the following year. “This relief applies to all health FSAs, including HSA-compatible health FSAs, and also applies to all [DCAPs],” according to IRS Notice 2021-15. “However, health FSA amounts may be used only for medical care expenses, and [DCAP] amounts may be used only for dependent care expenses.”

This special carryover relief is available whether an employer has previously elected a carryover amount, a grace period, or neither. “In addition, an employer may limit the carryover to an amount less than all unused amounts and may limit the carryover to apply only up to a specified date during the plan year,” the IRS noted.

Grace Periods

For these same plan years, a cafeteria plan also has the option of extending a grace period throughout the following year. Like the unlimited carryover, the extended grace period is available whether an employer has previously elected a carryover amount, a grace period, or neither. However, the employer must choose one or the other for a given health FSA or DCAP.

“Subject to the nondiscrimination rules under §§ 125 and 129, an employer is permitted to adopt this relief for some, but not all, health FSA or [DCAP] participants,” the IRS added.

Midyear FSA Elections

For plan years ending in 2021, FSA participants may be allowed to change their contribution amount on a prospective basis at any time during the year, regardless of whether any of the usual criteria for a midyear election change are met. This may include revoking an election, making one or more elections, or increasing or decreasing an existing election.

An employer but “may, in its discretion, determine the extent to which election changes are permitted, provided that any permitted election changes are applied on a prospective basis only,” according to the guidance. If a health FSA or DCAP election is revoked, the plan may decide whether amounts contributed before the election is revoked remain available for the rest of the plan year.

Interaction with HSAs

In general, coverage by a general-purpose health FSA disqualifies an otherwise eligible individual from contributing to a health savings account (HSA). Because a carryover is considered an extension of FSA coverage, “an individual is not eligible to make contributions to an HSA during a month in which the individual participates in a general purpose health FSA to which unused amounts are carried over,” the IRS stated.

However, if an employer does not allow reimbursement of expenses after a health FSA is revoked, or allows reimbursement only of pre-revocation expenses, an employee may begin contributing to an HSA as soon as the FSA revocation takes effect. Employers also may allow mid-year elections to be covered by a general purpose health FSA for part of the year and an HSA-compatible, limited purpose health FSA for part of the year.

Post-termination Relief

Employees who stop participating in a health FSA during 2021 or 2022 may be given until the end of the year to incur medical expenses and spend down their remaining balances. (This was already allowed for DCAPs.) The option to allow such an extended period for incurring claims “is available to § 125 cafeteria plans that currently have a grace period or provide for a carryover, as well as plans that currently do not have a grace period or provide for a carryover,” according to the guidance.

As a practical matter, being able to carry over an entire year’s amount or extend the grace period for a full year amounts to the same relief, “as both provisions allow all unused benefits remaining for plan years ending in 2020 and 2021 to be made available for the same benefit (medical care expenses or dependent care expenses) incurred in the immediately subsequent plan year,” the IRS noted.

However, “the two types of relief interact differently with an extended period for incurring claims,” in that an employer with an extended grace period “may also allow employees who have ceased participation in a plan in an earlier plan year to further extend a period for incurring claims until the end of the subsequent plan year,” the IRS continued. This extra year is not available for employers that allow a carryover rather than a grace period, and employers still may not have both.

As with the carryovers and grace periods, the post-termination relief is not an all-or-nothing proposition. For example, an employer may “limit the unused amounts in the health FSA to the amount of salary reduction contributions the employee had made from the beginning of the plan year,” the IRS stated.

Even if expenses incurred after FSA termination may be reimbursed, termination of a health FSA will still be considered a qualifying event under the Consolidated Omnibus Budget Reconciliation Act, triggering the usual election notice, the IRS added.

DCAP Age Limit Relief

The CAA allows employers to raise the DCAP age limit from 13 to 14 in certain circumstances. This relief applies for the last plan year whose enrollment ended by January 31, 2020, and for an employee who has an unused balance from that plan year, the following year as well.

To be eligible, an employee must have been enrolled in a DCAP for the last plan year whose enrollment ended by January 31, 2020, and must have a dependent who turned 13 during that year or (in the unused balance scenario) the following year.

Other Cafeteria Plan Elections

Significantly, Notice 2021-25 went beyond the CAA’s FSA provision and provided midyear election relief for cafeteria plans more generally, to extend the flexibility offered last year in Notice 2020-29.

That is, for plan years ending in 2021, employees will be allowed to:

  • Elect health coverage if they initially declined it at the start of the plan year;
  • Revoke an existing election and instead choose different health coverage offered by the same employer; or
  • Revoke an existing election to enroll in other health coverage.

Employers may choose to grant partial relief, such as:

  • Prohibiting the reduction of FSA or DCAP elections below amounts already reimbursed;
  • Allowing midyear elections without a status change only up to a certain date; or
  • Limiting the number or elections during the plan year that are not associated with a status change.

Plan Amendments

An employer that adopts any of the above relief must amend the cafeteria plan accordingly. The plan may be amended retroactively as long as:

  • The amendment is adopted by the last day of the first calendar year beginning after the end of the plan year in which the amendment took effect; and
  • The plan is operated consistently with the amendment from the time it takes effect.

A plan may be amended retroactively to the beginning of the applicable plan year, as long as it is operated accordingly and all eligible employees are notified of the changes. Notice requirements also might apply under laws like the Employee Retirement Income Security Act, the IRS noted.

Article provided by content partner BLR.  Author David A. Slaughter, JD, is a Senior Legal Content Specialist. His specialties include employee benefits and privacy compliance.