Late last year, Congress passed another COVID-19 relief bill, known as the Consolidated Appropriations Act, 2021 (CAA), which was signed into law by former President Trump on December 27, 2020. This new piece of legislation was enacted to, among other things, extend several provisions of the Coronavirus Aid, Relief, and Economic Security (CARES) Act.
Below please find further explanation of which MidAmerica benefit plans are affected by the CAA and what the new legislation means for participants in these programs.
MidAmerica’s Flexible Spending Account (FSA) Plan Amendment Response
MidAmerica has thoroughly reviewed the CAA and, in the best interest of both the participant and the organization, have determined the following FSA and Dependent Care Account (DCA) plan amendment defaults. If you currently provide an FSA or DCA and do not want the below defaults enabled for your plan, the employer must contact MidAmerica by February 26, 2021.
MidAmerica will default to the following FSA/DCA CAA amendments:
- The Carryover Rule. If the FSA currently has a carryover in place, we will extend the carryover in accordance with the CAA. If the FSA currently does not have a carryover OR a grace period, we will add the carryover in accordance with the CAA.
- Grace Period. If the FSA currently has a grace period in place, we will extend the grace period in accordance with the CAA.
- Change in Status. MidAmerica will continue to accept election changes at any time for any reason.
- Post-Termination Reimbursements. MidAmerica will not implement this change unless requested by the employer.
- Dependent Care Accounts. MidAmerica will not implement grace periods or carryovers unless requested by the employer.
- Dependent Care Carryforward. MidAmerica will not implement the carryforward unless requested by the employer.
If an employer chooses to implement any of these optional provisions, they must operationally comply with them until they amend their plans to reflect the change(s). Amendments to FSA plans must be completed by the end of the first calendar year after the plan year in which the change is effective. For example, plan amendments for plan year 2020 must be adopted on or before December 31, 2021.
A Complete Breakdown of the New Rules for Medical FSAs and DCAs
The CAA provides employers with greater flexibility to grant their employees access to unused funds after the plan year ends, for both their medical flexible spending accounts (FSAs) and their DCAs, up to and including the 2022 plan year. Both program types will now have more freedom regarding:
The Carryover Rule.
For plans that allow carryover of unused amounts into the new plan year, the previous cap of $550 has been waived. Another distinction is the ability to apply the carryover rule to DCAs. Previously, DCAs could impose a grace period but not the carryover rule.
Prior to the CAA, the grace period—an extended period of coverage that allows participants extra time to incur expenses by allowing them to use their remaining FSA dollars after the close of the plan year—was permitted for only the first 2 ½ months of the new plan year. With the CAA, the grace period can be extended for a full twelve (12) months.
With the new legislation, the carryover rule and the grace period accomplish the same thing—the full amount of unused dollars at the close of the 2020 plan year can be used in the 2021 plan year. It’s important to note that while both FSAs and DCAs can now apply the carryover rule or the grace period, only one is permitted. The plan cannot have both.
Unused funds in 2022.
Both the carryover rule and the grace period will continue to be applicable to plan years ending in 2021. That means any unused funds can be carried over into 2022, with no cap, OR available for a 12-month grace period in 2022, provided the employer has elected to apply either of these rules to the plan.
Change in Status.
For plan years ending in 2021, employers may now permit employees to change their FSA or DCA elections at any time for any reason. This was previously allowed only if an employee had a change in status event. However, if the plan year does not coincide with the calendar year, participants should be reminded that employee election amounts across plan years cannot exceed the annual contribution limit. The annual contribution limits for FSA and DCA have not been affected by the CAA.
Under the new law, if a plan is amended to allow it, employees who cease to participate in a health care FSA during 2020 or 2021 will be able to use their remaining balances through the end of the year in which participation ceased (plus any grace period) without having to opt for COBRA. Previously, employees who stopped participating in a health care FSA could only access their FSA remaining balances if the plan allowed for a run-off period or once they enrolled in COBRA.
For DCAs, employees who cease to participate may be allowed to continue filing dependent care claims for expenses incurred through the end of the year, if their plan is set up that way. This continues to be the practice under the CAA.
Dependent Care Carryforward.
Participants enrolled in a DCA who have a child that turned age 13 in the 2020 plan year may now be reimbursed for expenses incurred after the child’s 13th birthday for the remainder of the plan year. If there is an unused balance at plan year-end, they may be reimbursed in the following year until the child turns 14. Previously, dependent care expenses incurred after the child turned 13 were ineligible for reimbursement.
Health Savings Account (HSA) Coordination
It’s important to note that the CAA has not changed how FSAs interact with Health Savings Account (HSA) eligibility. Employees who participated in a medical FSA for 2020 but who will be enrolling in a high deductible health plan with an HSA for the 2021 plan year will still be subject to the existing limitations imposed on their access to their prior medical FSA funds. To be clear, employees may not contribute to a Health Savings Account (HSA) while participating in a general-purpose medical FSA. Internal Revenue Service (IRS) Publication 969 explains the HSA/FSA interaction rules. Employers will need to consider how the new FSA rules, if implemented, will affect an employee’s eligibility for an HSA in 2021 or 2022.
Amendments for FSAs and DCAs
- The new rules outlined above are not mandatory. Employers may opt to apply some, all, or none of the new rules.
- Employers can choose to which plans they apply the rules. An employer may opt to apply a rule to both medical FSAs and DCAs, to medical FSAs but not DCAs, or to DCAs but not medical FSAs.
- Employers can choose to which plan year to apply the rules. An employer can decide to apply the rules to the 2020 plan year but not the 2021 plan year, vice versa, or to both years.
With COVID-19 cases continuing to surge in the U.S. and a new administration now in the White House, the Consolidated Appropriations Act, 2021 will probably not be the last piece of legislation to come out of Washington, D.C. related to the pandemic and its effect on the American economy. MidAmerica will continue to monitor the situation and will provide information as it becomes available.
Have questions? We’re here to help.
If you have questions about the CAA, its impact to your plan or the MidAmerica amendment defaults, don’t hesitate to contact our Account Management team at [email protected]. You can also download MidAmerica’s complete CAA bulletin by clicking here.