Last year, as companies and employees were struggling with operational changes necessary to safely deal with the COVID-19 pandemic, the Internal Revenue Service IRS provided relief that allowed employers to tweak benefits plans so that employees had increased flexibility to make mid-year changes to dependent care spending accounts.
This change helped parents who had set aside tax-deferred money in child care accounts, but because their kids were at home while mom and/or dad also worked at home, did not need as much care account funds as they anticipated pre-pandemic.
Today, the IRS has issued additional guidance on the latest coronavirus law that provides similar additional flexibility for employers who offer these workplace health flexible spending accounts (FSAs) and dependent care assistance programs.
Old law, new situations: Under usual circumstances, existing tax law lets an employer give workers the option to carry forward up to $500 in a medical FSA to the next benefits year. Or a workplace can give workers with health FSAs until March 15 to use any money they didn't spend by the end of the year-end benefits year. If the company decides to give workers more FSA flexibility, it must choose one or the other.
Regardless of which option is offered, the effect is that workers get more time to use their pre-tax dollars to pay for qualifying medical expenses. With both medical and dependent care FSAs, if the amounts aren't spent within the allowable time period, they will lose the money.
Coronavirus consequences, however, mean that employees who've enrolled in these tax-deferred accounts are more likely to have unused health amounts at the end of 2020 and 2021.
Thanks to the COVID-related provisions in the Taxpayer Certainty and Disaster Tax Relief Act of 2020, signed into law on Dec. 27, 2020, employers now can offer account flexibility tax years 2021 and 2022 similar to that granted for 2020. These additional workplace plan adjustments, detailed in IRS Notice 2021-15 issued Feb. 18.
And that should help their employees better meet ongoing unanticipated circumstances created by the persistent pandemic.
Added time for FSA spending: Employers now may amend their cafeteria benefits plans, which allow (as the name implies) workers to select from a variety of workplace perquisites, so that employees can carry over all unused FSA amounts to the next plan year.
Or, per the changes, the company can establish an extended 12-month grace period after the end of the current year. If the grace period option is selected, employees may incur expenses that can be reimbursed from current-year contributions.
The carryover of unused amounts or extension of the grace period applies to 2020 and 2021 plan years. Other FSA flexibility for employers discussed in the IRS guidance includes:
- Flexibility to adopt a special rule regarding post-termination reimbursements from health FSAs;
- Flexibility for a special claims period and carryover rule for dependent care assistance programs when a dependent ages out during the COVID-19 public health emergency; and
- Allowance of certain mid-year election changes for health FSAs and dependent care assistance programs for plan years ending in 2021.
These changes will be in effect for two years. That means an FSA operating in a calendar year may allow unlimited carryovers from 2020 to 2021 and from 2021 to 2022.
No life event necessary: In addition, the new law also permits cafeteria plans to be amended to allow employees to change their FSA contribution elections prospectively for plan year 2021 without the need for a triggering event that would justify such a change. The life-changing events that typically allow for FSA plan changes include a change in:
- Legal marital status, such as marriage, legal separation, divorce or death of a spouse.
- Employment status of the employee, his/her spouse or a dependent that affects eligibility for health insurance benefits.
- The number of tax dependents.
Again, the new law gives employers the option to make the allowed revisions to their employee benefit programs. It is voluntary, not a requirement. So check with your company if you have any questions about the treatment or use-it-or-lose-it deadline for your FSA contributions.
You also might find these items of interest:
- COVID-19 law expands FSA OTC options & ends Rx rule
- Comparing tax-favored HSA, HRA & FSA medical options
- 10 ways FSA/HSA funds can help you cope with COVID-19
|Coronavirus Caveat & More Information
In 2020, we're all dealing with extraordinary circumstances,
both in our daily lives and when it comes to our taxes.
The COVID-19 pandemic and efforts to reduce its transmission
and protect ourselves and our families means that,
for the most part, we're focusing on just getting through these trying days.
But life as we knew it before the coronavirus will return,
along with our mundane tax matters.
Here's hoping that happens soon!
In the meantime, you can find more on the virus and its effects on our taxes
by clicking Coronavirus (COVID-19) and Taxes.