Contained within the recent Stimulus Bill is the Taxpayer Certainty and Disaster Tax Relief Act of 2020. Section 214 of that Act provides flexibility for Health Flexible Spending Accounts (Health FSA) and Dependent Care Accounts (DCA).
Background
HFSAs and DCAs have certain limitations and restrictions known as the ‘use or lose’ rule, which generally provide that amounts not used by the end of the year are forfeited. Prior to the temporary changes described below, these accounts were permitted to have a 2 ½ month grace period during which the participant could be reimbursed for expenses incurred during the grace period with unused amounts from the prior year.
Health Flexible Spending Accounts, in lieu of a grace period, have been allowed to have a ‘carryover’ of a limited amount to be used for expenses incurred at any time after the end of the plan year. For 2021 this limit is $550.
Temporary Changes
Under the new legislation, the grace period is significantly extended to 12 months for both the 2020 and 2021 Plan Years. The “carryover” provisions are extended to Dependent Care Accounts and now allow for both Dependent Care Accounts and Health Flexible Spending Accounts to allow all unused funds in the 2020 and 2021 plan years to be carried over into the next plan year.
In addition, for plan years ending in 2021, participants may prospectively change their elections regardless of whether they have had a ‘change in status’ event.
Health Flexible Spending Accounts may now allow terminated participants to use their accounts for permitted expenses, even after a termination of employment, as is currently permitted for Dependent Care Accounts.
Finally, under certain circumstances, Dependent Care Accounts are allowed to cover dependents up to age 14 (an increase from age 13) for a plan year which had an open enrollment period that ended on or before January 31, 2020. Also, if there were unused amounts in that plan year, coverage is permitted during the following plan year until the dependent’s 14th birthday.
Amendments
Although all the changes above are optional, they may be adopted immediately. If any of them are adopted, plan amendments are required by the end of the calendar following the year when they are effective. Thus, a change put into effect for a 2020 Plan year will need to be in an amendment adopted by December 31, 2021.
We are happy to assist with any of the above.
For questions, please reach out to Timothy S. Klimpl or Mark F. Williams.
Timothy S. Klimpl
(203) 252-2683; tklimpl@carmodylaw.com
Mark F. Williams
(203) 575-2618; mwilliams@carmodylaw.com
You may also reach out to any member of Carmody’s Labor & Employment team.
Giovanna Tiberii Weller
(203) 575-2651; gweller@carmodylaw.com
Domenico Zaino, Jr.
(203) 578-4270; dzaino@carmodylaw.com
Alan H. Bowie
(203) 784-3117; abowie@carmodylaw.com
Maureen Danehy Cox
(203) 575-2642; mcox@carmodylaw.com
Stephanie E. Cummings
(203) 575-2649; scummings@carmodylaw.com
Pamela Elkow
(203) 252-2672; pelkow@carmodylaw.com
Vincent Farisello
(203) 578-4284; vfarisello@carmodylaw.com
Sarah S. Healey
(203) 578-4225; shealey@carmodylaw.com
Lauren M. Hopwood
(203) 784-3104; lhopwood@carmodylaw.com
Howard K. Levine
(203) 784-3102; hlevine@carmodylaw.com
Sherwin M. Yoder
(203) 784-3107; syoder@carmodylaw.com
Ann H. Zucker
(203) 252-2652; azucker@carmodylaw.com