Consolidated Appropriations Act Effect on FSA
On December 27, 2021, President Trump signed into law—a massive bill titled the Consolidated Appropriations Act, 2021 that includes stocking stuffers in the form of significant health and dependent care FSA relief. The bill passed easily by a 359-53 margin in the House and 92-6 in the Senate.
Full FSA Carryovers from 2020-2021 and 2021-2022 Plan Years:
For both the health FSA and the dependent care FSA, the plan may permit carryovers of the full unused balance from plan years ending in 2020 and 2021 into the subsequent plan years ending in 2021 and 2022, respectively.
Extended FSA Grace Periods for 2020 and 2021 Plan Years:
For both the health FSA and the dependent care FSA, the plan may have a 12-month grace period after the plan years ending in 2020 or 2021.
Health FSA Spend Down:
Similar to the spend down option available under the dependent care FSA, the health FSA may permit employees who terminate participation mid-year during calendar year 2020 or 2021 to continue to incur reimbursable claims for the remainder of the plan year in which participation ceased.
Dependent Care FSA Relief for Children Who Reached Age 13:
Employees whose children reached age 13 during the last dependent care FSA plan year for which the enrollment period was on or before January 31, 2020 may continue to treat the child as eligible up to age 14 for such plan year.
FSA Election Change Relief:
Building on the prior IRS election change relief for 2020, the bill provides that the cafeteria plan may permit employees to change their health FSA or dependent care FSA election during plan years ending in 2021 without experiencing a permitted election change event.
Plan Amendments May be Retroactive:
Employers wishing to offer any of these optional FSA relief provisions must amend the Section 125 cafeteria plan to incorporate the changes. The amendment may be retroactive as along as it is adopted no later than the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective, and the plan is operated consistent with the terms of the amendment during the full retroactive period.
The health and dependent care FSA are components of the Section 125 cafeteria plan. Internal Revenue Code §125 (and its implementing regulations) imposes strict limitations on the administration of cafeteria plans.
The most fundamental of these limitations are that all FSA elections are irrevocable absent a permitted election change event, and all FSA contributions are subject to the use-it-or-lose-it rule. After the end of the plan year and any grace period and/or run-out period, any remaining unreimbursed funds not subject to a $550 health FSA carryover must be forfeited to the plan.