IRS Issues Guidance on FSA Changes and Permits New Benefit Elections

On February 18, 2021, the Internal Revenue Service ("IRS") issued Notice 2021-15 to provide plan sponsors with guidance on implementing recently passed relief under the Consolidated Appropriations Act, 2021 ("CAA") with respect to health and dependent care flexible spending accounts ("FSAs"). Notice 2021-15 addresses the FSA relief under the CAA and provides additional relief with respect to employee elections for health, dental, and vision coverage in 2021. Employers may choose to use any or all of this relief to assist their employees whose health and dependent care needs have shifted in light of the ongoing public health emergency.

The CAA provides temporary special rules for health and dependent care FSAs by allowing plan sponsors the option to increase carryover amounts or extend grace periods that relate to FSAs ending in 2020 and 2021 into 2021 and 2022, respectively. The CAA also allows for post-termination reimbursements from health FSAs during plan years 2020 and 2021, and it temporarily extends the dependent age limit under dependent care FSAs to age 14 for children who would otherwise age out during the COVID-19 public health emergency. Finally, the CAA permits certain mid-year election changes for FSAs for plan years ending in 2021. Read our previous client alert on the CAA for more information about these and other provisions in the CAA impacting employer welfare plans.

IRS Notice 2021-15 provides implementation guidance on provisions of the CAA relating to health and dependent care FSAs. Specifically, the Notice:

• addresses application of the temporary carryover and grace period provisions, including application of the nondiscrimination rules, with several examples, and outlines practical considerations for employers considering this relief;
• provides significant discussion on the coordination of the carryover and grace period provisions with HSA eligibility and offers a number of design alternatives that employers may utilize to preserve their employees' HSA eligibility while still taking advantage of this relief;
• includes examples with respect to operation of the increased age limit for dependent care FSAs, and clarifies the employer reporting responsibilities with respect to dependent care FSAs; 
• clarifies how an employer's option to permit post-termination health FSA reimbursements under the CAA is separate from the employer's COBRA obligations, which continue to apply to health FSA coverage upon a qualifying event; and
• grants employers significant flexibility in allowing mid-year elections to make new FSA elections in 2021 without a qualifying event, including allowing employees to elect FSA coverage in order to take advantage of the temporary carryover or grace period relief.

Apart from the CAA, the Notice also grants additional relief for mid-year elections similar to that provided under Notice 2020-29, with respect to health, dental, and vision plan coverage. The guidance is welcome to employers and FSA administrators in providing significant flexibility in implementing this transition relief.

For more information on these rules, please contact Tara Sciscoe, Chris Sears, Shalina Schaefer, or the Ice Miller Employee Benefits attorney with whom you regularly work.

This publication is intended for general information purposes only and does not and is not intended to constitute legal advice. The reader should consult with legal counsel to determine how laws or decisions discussed herein apply to the reader’s specific circumstances.