On December 27, President Trump signed the Economic Aid to Hard Hit Small Businesses, Nonprofits and Venues Act into law. It makes temporary changes to rules governing health and dependent care flexible spending accounts and allows employers who sponsor such plans to provide employees with more time to utilize these benefits.
Below is a summary of these temporary provisions.
For plan years ending in 2020, employers may permit participants to carry over any unused benefits or contributions remaining in the participant’s flexible spending account to the subsequent plan year without limitation. For example, if the plan year ends on December 31, 2020, the employer may permit participants to carry over any unused balance to December 31, 2021. Prior to the Act’s passage, carryover amounts were allowed only for health flexible spending account and were limited to $550.
Employers may extend the grace periods for plan years ending in 2020 or 2021 for up to 12 months after the end of the plan year for both health and dependent care flexible spending accounts.
Employers may permit an employee who ceases participating in the health flexible spending account during the 2020 or 2021 calendar year to continue to receive reimbursements from unused benefits through the end of the plan year in which the participant’s participation ceases including any grace period.
Employers may allow employees to prospectively change their elections mid-year for health and dependent care flexible spending accounts for a plan year ending in 2021, subject to the maximum contribution amount allowed by law.
For dependent care flexible spending accounts, the age for qualifying dependents whose care can be paid for increased to age 13 but only for plans with an enrollment period ending on or before January 31, 2020, and only for employees who had dependents who turned 13 during that plan year (or the subsequent plan year if the employee is carrying over amounts to the subsequent plan year). Only the amounts for the plan year whose enrollment period ended on or before January 31, 2020, can be used for these dependents turning 13 during that time.
For example, an employee participating in a calendar year plan could use her 2020 dependent care flexible spending account balance for care provided to her child who turns 13 in 2020. If the employee did not utilize her entire balance in 2020 and the plan implements the temporary change allowing a carryover of the unused balance to the 2021 plan year, the employee could use the 2020 amounts for any child who turns 13 in 2021 also. (Note, this particular change as worded in the Act could be interpreted as being required and employers should monitor guidance from the IRS on its implementation).
Employers should consider the implications these changes may have on administration and monitor regulatory guidance regarding implementation.
Employers who decide to implement these changes are required to amend their plans 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. For calendar year plans, employers are required to amend their plans no later than December 31, 2021. For employers with non-calendar year plans who desire to implement these changes for their current plan years, the amendments would need to be adopted by December 31, 2022.
Employers with non-calendar year plans may find adopting retroactive changes for plan years ending in 2020 to be administratively challenging. If an employer with a non-calendar year plan would like to adopt these changes for a plan year that ended in 2020, the amendment needs to be adopted by December 31, 2021.
The Big Picture
Additional guidance on implementing these changes is expected from the IRS. Other than the possible exception noted above for the limited change in the definition of “dependent” for dependent care flexible spending accounts, these changes are permissive, meaning an employer is not required to implement them.
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