Flexible Spending Accounts (FSAs) are known for their “use it or lose it” features, whereby employees have little opportunity, if any, to use FSA funds outside the current plan year.
The COVID-19 pandemic upended most employees’ healthcare and dependent care plans for 2020, leaving many plan participants with higher-than-usual unused balances in their FSAs. The new stimulus package, Consolidated Appropriations Act, 2021, addresses this issue by allowing FSA plan sponsors to implement more flexible rules for 2020 and 2021 plan years.
Depending on the plan’s current carryover or grace period rules, the Act permits plan sponsors to:
- Expand carryover rules to allow unused FSA healthcare and dependent care funds in 2020 and 2021 plan years to be carried over to the next plan year.
- Extend existing grace periods by 12 months for 2020 and 2021 plan years.
- Allow terminated employees with unused FSA funds to continue to receive reimbursements from healthcare FSAs for the remainder of the plan year in which the employee was terminated, plus any grace period.
- Extend dependent care age limitations to cover expenses for dependents until the age of 14 (normally 13) for the 2020 plan year only.
These changes are optional, so it is important to check with your plan administrator to learn what FSA relief, if any, is available to your employees.