Policy & Advocacy

February 23, 2021

The Consolidated Appropriations Act, 2021 (CAA), signed into law in December 2020, included provisions allowing carryover of health flexible spending account (health FSA) and dependent care assistance program (DCAP) balances from 2020 into 2021 and 2022. On February 18, 2021, the Internal Revenue Service (IRS) issued guidance on implementation of these carryovers and other options for health FSAs and DCAPs. We summarize this guidance below.

DCAP Options

School and child care closures due to the COVID-19 pandemic resulted in many DCAP participants having unused balances at the end of 2020. Normally, these unused balances would be subject to the “use-or-lose” rule that requires forfeiture of unused balances at the end of the plan year. As a remedy, the CAA and IRS guidance allow the following optional, temporary plan provisions:

Participants can carry over their entire unused balances from the 2020 plan year to 2021 and from the 2021 plan year to 2022. Because an annual maximum contribution of $5,000 remains available, participants who carry over may have up to $10,000 available for DCAP reimbursements in 2021 and $15,000 in 2022. Tax-favored status applies to the entire amount available. For the 2022 and following plan years, the prior use-or-lose rule will apply.
Grace periods—during which participants can incur new expenses and submit claims—for plan years ending in 2020 and 2021 can be extended to 12 months after the end of the plan year.
An employer can choose to adopt the carryover or extended grace period but not both.
For the 2021 plan year, an employer can (but is not required to) allow participants to make mid-year election changes even if a change in status has not occurred.
If a dependent turned 13 in the 2020 plan year, DCAPs can reimburse child care expenses up to age 14 in the 2020 and 2021 plan years.
An employer can amend plan documents retroactively to incorporate these new rules, provided amendments are adopted no later than 1 calendar year after the year amendments are effective (December 31 for a calendar year plan).
If an employer chooses to adopt any of the above relief, it must notify eligible employees of the changes to the plan.

Health FSA Options

The COVID-19 pandemic also may have resulted in health FSA participants having larger than usual balances at the end of 2020. Normally, carryovers would be limited to $550 (if permitted by the plan), and amounts above $550 would be forfeited at the end of the plan year. As a remedy, the CAA and IRS guidance allow the following optional, temporary plan provisions:

Participants can carry over their entire unused balances (normally limited to $550) from the 2020 plan year to 2021 and from the 2021 plan year to 2022. For the 2022 and following plan years, the prior $550 carryover limit (adjusted for inflation) will apply.
Grace periods—during which participants can incur new expenses and submit claims—for plan years ending in 2020 and 2021 can be extended to 12 months after the end of the plan year.
An employer can choose to adopt the carryover or extended grace period but not both.
For the 2021 plan year, an employer can (but is not required to) allow participants to make mid-year election changes even if a change in status has not occurred.
Participants who terminate employment in 2020 or 2021 can continue submitting health FSA claims and receiving reimbursements through the end of the year and any applicable grace periods.
An employer can amend plan documents retroactively to incorporate these new rules, provided amendments are adopted no later than 1 calendar year after the year amendments are effective (December 31 for a calendar year plan).
If an employer chooses to adopt any of the above relief, it must notify eligible employees of the changes to the plan.

Next Steps for Employers

We recommend that employers choosing to adopt any of the above health FSA or DCAP relief:

Decide the extent of the relief they want to make available (dollar limits, time limits, carryover or grace period, applicable years, etc.);
Discuss with HR, payroll, and third-party vendors how they will implement this relief;
Discuss internally and with any third-party vendors (if applicable) how they will provide the required notices to employees; and
Begin the process for adopting the necessary plan amendments.