February 18, 2021: NEW! Flexibility for health FSAs and dependent care assistance programs for your business! Due to the Coronavirus pandemic, the IRS announced that they will be introducing new flexibility.
Notice 2021-15 responds to unanticipated changes in the availability of certain medical care and dependent care. Due to COVID-19 and the inability to find dependent care, many participating employees are likely to have unused health FSA amounts or dependent care assistance program amounts at the end of 2020 and 2021. Generally, under these plans, an employer allows its employees to set aside a certain amount of pre-tax wages to pay for medical care and dependent care expenses. Amounts spent by the employee are then reimbursed at the start of the next year from their designated health FSAs or dependent care assistance programs. Since (in some cases) the employee didn’t meet their dependent care of FSA needs, there’s a possibility that they aren’t eligible to request that full reimbursement. Here are some specifics about what has changed with Notice 2021-15:
Notice 2021-15 flexibility related to health FSAs and dependent care assistance programs:
- Provides flexibility for the carryover of unused amounts from the 2020 and 2021 plan years;
- Provides flexibility to extend the permissible period for incurring claims for plan years ending in 2020 and 2021;
- Provides flexibility to adopt a special rule regarding post-termination reimbursements from health FSAs;
- Provides 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
- Allows certain mid-year election changes for health FSAs and dependent care assistance programs for plan years ending in 2021.
Millions of employees have access to health FSAs and dependent care assistance programs, sponsored by employers under “cafeteria plans.” The decision to adjust these employee benefit programs is at the discretion of the employer that sponsors the plan.
Prior to this new guidance being released, the IRS provided flexibility to employers with cafeteria plans through the end of calendar year 2020, during which employers could permit employees to apply unused health FSA amounts and dependent care assistance program amounts to pay for or reimburse medical care or dependent care expenses. The Taxpayer Certainty and Disaster Tax Relief Act of 2020, signed into law on December 27, 2020, provides similar flexibility for these arrangements in 2021 and 2022.
The amounts properly spent are not subject to federal income tax. Typically, account funds that are not spent by the employee within the plan year, subject to limited grace periods or certain carryover amounts, are forfeited. In accordance with the Taxpayer Certainty and Disaster Tax Relief Act of 2020, Notice 2021-15 gives employers the option to amend their plans to provide greater flexibility for employees to elect and use these programs during the pandemic without risking the forfeiture of the amounts they have set aside.
Contact our experts today if you have questions about how this added flexibility will impact you.
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