2021 Consolidated Appropriations Act (CAA) Effects on FSAs
February 17, 2021
The Consolidated Appropriations Act, 2021 (CAA) was signed into law on December 27, 2020. Designed to provide economic relief for victims of the COVID-19 pandemic, the relief provided limited provisions that directly affect tax-advantaged savings or health and welfare arrangements. Employers have the option to take advantage of these permitted, non-mandatory, provisions as long as the plan is amended to do so. Find more details in this summary.
If adopting the provisions, Health FSAs and Dependent Care FSAs must be amended by the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective. So, calendar year 2020 plan amendments must be adopted on or before December 31, 2021. In the interim, the plan must operate consistent with the terms of the amendment.
Limited FSAs, Health FSAs & Dependent Care FSAs
For plan years ending December 31, 2020 and December 31, 2021 or non-calendar year plans that begin after January 1, 2020, the employer can choose to carryover all unused benefits to the following plan year. This is a temporary provision that only applies for two years. Employers have options to choose to carryover for 2020 and/or 2021 and other specific plan provisions defined in the amended plan.
For plans that have a grace period associated with the plan year that ends on December 31, 2020 and December 31, 2021 or non-calendar year plans that begin after January 1, 2020, the employer can choose to extend the grace period up to 12 months total from the normal allowed maximum of 2.5 months. Employers are permitted to forgo a grace period and amend the plan to take advantage of the carryover instead.
For plan years ending in 2021, participants are permitted to prospectively modify their contribution elections (without regard to a change in status). Just as the changes afforded for FSAs by Bulletin 2020-29 last year, similar election modifications should be allowable and can be applied to FSAs and DCFSAs. An example of this would be to limit decreases in FSA elections to not go beyond what has already been reimbursed. A participant should also presumably be able to make a new election.
Limited FSAs & Health FSAs
If employees are terminated with money from their contributions left in their account, the employer can choose to amend the plan to permit an employee who stops participating in the plan mid-year in 2020 or 2021 to continue to receive reimbursements of their unused contributions through the end of the plan year in which their participation ceased. (If their plan adopts the 12-month grace period, the extended grace period would apply.) This provision is designed to function as a DCFSA does today in theory. Employers should be able to place restrictions on plan design elements such as limiting the time frame for taking advantage of the funds.
Dependent Care FSAs
If a dependent “aged-out” of eligibility during 2020, employers have the option to increase the maximum age under a DCFSA from 12 to 13 and carry over 2020 contributions into the 2021 plan year. This does not apply to all dependents, is only for previously contributed funds that are rolled over, and is subject to the following limitations:
- Employee was enrolled in the DCFSA for a plan year where the end of the regular enrollment period was on or before January 31, 2020.
- Employee had one or more dependents who attained age 13 during the plan year pandemic.
- Employee had an unused balance for a plan year that will be carried forward to 2021.
Please be aware that certain provisions of the CAA are not yet clear and require further legal interpretation. Chard Snyder is awaiting additional guidance from the Internal Revenue Service. Read our current FAQs here.
In the absence of clear regulatory guidance, implementation of some CAA provisions could cause potential compliance issues. Also be aware that amending current plan benefits could create administrative challenges. Therefore, Chard Snyder advises employers to carefully consider the positive and negative impacts of adopting these provisions, and to seek professional tax and legal advice on adopting plan amendments based on CAA provisions.
Please reach out to your Chard Snyder Client Relationship Manager with questions or to submit the election form to communicate CAA provisions you choose to adopt.