IRS Grants Additional Flexibility for Health FSAs and Dependent Care Assistance Programs

February 26, 2021

One facet of the federal response to the COVID-19 pandemic has been increased flexibility for employers and employees on financial matters ranging from unemployment tax payments to meal and entertainment deductions. Greater discretion over financial choices was extended again with the passage of the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (the Act), signed into law on December 27, 2020. On February 18, 2021, the IRS released Notice 2021-15 to clarify the application of Section 214 of this Act.

Prior IRS guidance announced temporary special rules through the end of 2020 for health flexible spending arrangements (FSAs) and dependent care assistance programs operating under cafeteria plans. Under these temporary rules, employers could permit employees to apply unused FSA amounts and dependent care assistance program amounts to pay for or reimburse medical care or dependent care expenses. The Act provides similar flexibility for these arrangements in 2021 and 2022.

Notice 2021-15 informs employers that they may amend their plans to provide greater flexibility for employees to elect and use these programs during the pandemic without forfeiting amounts previously set aside. According to this notice, the Act provides flexibility:

  • for the carryover of unused amounts from the 2020 and 2021 plan years
  • to extend the permissible period for incurring claims for plan years ending in 2020 and 2021
  • to adopt a special rule regarding post-termination reimbursements from health FSAs
  • 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

The Act also allows certain mid-year election changes for health FSAs and dependent care assistance programs for plan years ending in 2021.

If you need further guidance in applying this flexibility to your particular situation, our expert team of state and local tax professionals at Geffen Mesher is ready and prepared to help navigate these changes for your business.

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