Has the IRS provided any guidance on additional cafeteria plan relief?
The Consolidated Appropriations Act, 2021 (CAA) provides relaxation of certain cafeteria plan spending account requirements (see our At Issue). Generally, a cafeteria plan including spending account elections are binding for 12 months and can only be changed in limited circumstances prescribed by the plan.
2020 and the coronavirus situation caused a bit of havoc for participants and their spending accounts. The IRS provided guidance in 2020 relaxing many of the rules (see Qs 1-4 in Employee Benefit Plan Considerations under Cafeteria Plans). The CAA extends and expands upon this relief applicable to plan years ending in 2020 and 2021. In summary, Notice 2021-15 provides temporary relief for cafeteria plans, health FSAs and dependent care FSAs and offers guidance on how these provisions should be implemented. Notably, Notice 2021-15 extends some of the Notice 2020-29 and Notice 2020-33 guidance that was not provided for in the CAA. Specifically, it continues the relaxation of the status change rules applicable to health, dental and vision plans, meaning that a plan may, but is not required, to allow individuals to make changes in coverage mid-year without a status change event. Individuals can increase, decrease or change their election. Note, if an individual elects to opt out of coverage, the individual can only do so if he/she attests to enrollment in other health coverage.
Health FSA and Dependent care FSA
The guidance affirms that there can be no cross pollination among spending accounts. Said another way, health FSA funds can only be used for health FSA purposes and dependent care FSAs can only be used for dependent care purposes. Further, the guidance confirms that there can be no cash out of either type of program. The guidance provides that both types of plans can allow an unlimited carry-over and either type of plan can have a grace period that extends up to 12-months. Though a plan cannot have a carry-over and grace period for the same plan year.
Effectively, this makes a carry-over and a grace period quite comparable. The only real distinction between the two relates to the health FSA spend down feature. The spend-down feature allows a health FSA to allow an individual upon termination to continue to incur claims and seek reimbursement for the balance of the plan year plus any grace period (does not apply to carry-over). The health FSA can be designed to eliminate access to funds already contributed less amounts reimbursed.
Allowing the spend-down does not change the obligation to offer COBRA. Note: a spend-down feature has been permissible in a dependent care assistance plan for many years.
The guidance provides several clarifications relating to options to allow HSA-eligibility. As a reminder, if an individual is covered by a general purpose health FSA, the individual is HSA-ineligible. If an individual moves to a HSA-compatible high deductible health plan (HDHP), the guidance provides that on a participant by participant basis, the health FSA:
- May allow forfeitures of available carry-overs or grace periods
- Conversion to a HSA-compatible limited purpose health FSA; or
- An automatic conversion to a HSA-compatible limited purpose health FSA.
This is more generous relief than is typically available. Generally, only for carry-overs can the election be participant by participant. For grace period, it must be uniform for all impacted participants.
The notice affirms that if an individual changes his/her election, all salary-reductions are prospective, however, the guidance does affirm that spending account funds can be used for claims incurred from the beginning of the plan year, meaning prior to the salary reduction change.
The guidance affirms that the temporary dependent care carry-over is to be treated similar to a dependent care assistance grace period. Specifically, the employer reports the elected amount on the individual’s Form W-2 in Box 10. It is then incumbent upon the individual to report the amount used, using Form 2441 when the individual files his/her personal tax return. Effectively, an individual can only exclude up to $5,000 per calendar year for dependent care assistance.
The notice provides many examples that may be useful for plan administrators to further understand how the guidance is to be implemented. Among these examples are some useful illustrations showing how this temporary relief ends as plans move forward into 2023, particularly as it relates to the expanded rules for carry-overs and grace periods.
Operation and amendment
As a reminder, changes allowed by the CAA are temporary and permissive. Notice 2021-15 gives the plan sponsor broad discretion in designing its plans to provide for some, all or none of this relief. The notice reminds employers that plans must be operated in accordance with the intended changes and must be amended by the end of the calendar year following the plan year for which the change takes effect.
The notice also clarifies that the Cares Act provision providing that OTC medication and women’s menstrual products can be reimbursed from spending accounts, such as health FSAs and health reimbursement arrangements, can be amended retroactive to January 1, 2020.