On February 28, 2021, the IRS issued Notice 2021-15, which provides guidance for the benefits-related provisions in the Consolidated Appropriations Act of 2021 (CAA), specifically those related to health FSA and DCAP relief. The IRS also provided new guidance regarding additional mid-year election changes permitted for plan years ending in 2021.
The IRS guidance provided in Notice 2021-15 explains that:
- **With respect to health FSAs and DCAPs, a plan cannot adopt both a carryover and an extended grace period for the same plan year (which is consistent with general rules). Further, any health FSA or DCAP can adopt an extended grace period or carryover, even if the plan did not previously offer such provision.
** An employer may choose to adopt an extended grace period less than 12 months in length. Similarly, an employer may choose to limit the carryover amount to less than the entire unused account balance and may limit the carryover to apply only up to a specified date during the plan year.
**Unused DCAP amounts carried over from prior years or made available during an extended period for incurring claims are not considered in determining the annual limit applicable for the following year. However, Notice 2021-15 does not indicate whether amounts above $5,000 are subject to taxation. Without further guidance, DCAP benefits used above $5,000 in a calendar year will likely be treated as taxable income when participants file their tax returns. See this edition’s FAQ.
** Prospective election changes may include an initial election to enroll in a health FSA or DCAP, which means that participants who initially waived coverage could make a new election to enroll mid-year without a qualifying life event. Further, employers may allow amounts contributed to a health FSA or DCAP after the prospective election change to be used for claims incurred prior to the election change.
- * For example, Deborah elects $1,000 for her calendar year health FSA. Deborah’s employer implements the health FSA election relief allowing for a mid-year election change without a qualifying life event. In March, Deborah increased her election to $2,000. Deborah can be reimbursed on a $2,000 claim from January (even though the claim was incurred prior to her increased election). This also applies if she enrolled in coverage mid-year through an election change.
- **A plan can be amended to permit employees, on an employee-by-employee basis, to opt-out of a carryover or extended grace period. In addition, an employer may permit employees to switch from a general-purpose health FSA to an HSA-compatible FSA (e.g., limited-purpose dental/vision or post-deductible FSA) mid-year.
**A plan may limit the time frame for which mid-year election changes may be made. Likewise, a plan can limit the number of mid-year election changes permitted without a qualifying life event.
**Plans may limit post-termination participation in a health FSA to employee contribution amounts made during the plan year prior to termination (also known as the health FSA spend-down provision). In addition, this option is available to participants who cease participation in a health FSA because of termination of employment, change in employment status (such as a furlough), or a new election during calendar year 2020 or 2021. The IRS reiterates that a post-termination participant still has COBRA rights.
**The special age limit relief for certain dependents who turned age 13 during the plan year is separate from the carryover and extended grace period relief. An employer that adopts the special age limit relief does not have to adopt the carryover or an extended grace period for employees to continue to use funds remaining from the previous plan year for such children.
Other Permitted Mid-Year Election Changes
In addition, the IRS provides that plans are permitted to allow participants to make mid-year election changes for employer-sponsored health coverage for plan years ending in 2021. Similar to earlier guidance provided in 2020 via IRS Notice 2020-29, a plan may permit employees to make a new prospective election if they originally declined coverage or revoke an existing election and make a new election to enroll in another group health plan sponsored by the same employer or other health coverage not sponsored by the employer (as long as the employee provides a written attestation to verify that they are or will be enrolled in coverage not sponsored by the employer).
Importantly, employers may choose to implement this relief, but are not required to do so. However, if employers do implement any or all this relief, it should be clearly communicated with employees. In addition, plan amendments are required. Further, the amendments can be retroactive if they are completed by the last day of the calendar year following the end of the plan year for which the change is effective (and, in the meantime, the plan operates in accordance with the terms of the amendment). This means amendments to plan years ending in 2020 would have to be completed by December 31, 2021.