Wish you could change your health plan for 2021? In newly released guidance on new flexible rules for healthcare and dependent care FSAs, the Internal Revenue Service has included a new Covid-19-relief surprise: Employers can allow employees to make changes prospectively to health care coverage for 2021.
“The guidance is very employer and employee friendly; it really give a lot of flexibility,” says Jake Mattinson, an employee benefits lawyer with McDermott Will & Emery in Chicago.
Notice 2021-15 allows for mid-year changes to employer-sponsored health care coverage, healthcare flexible spending accounts and dependent care accounts. It will help employees whose medical and caregiving situations have changed because of the coronavirus pandemic. That is, if your employer is on board.
Usually healthcare elections are set in stone on a calendar year basis. Last May, the Treasury Department came up with a partial mid-year fix for 2020, allowing prospective changes and extending grace periods and carryovers through year-end (IRS Notice 2020-29). But employees still cried foul: they had socked away more money than they could spend in these workplace tax-favored accounts, and would be subject to forfeiture rules. In December, in the tax provisions tied onto the year-end spending package, Congress passed new special rules allowing rollovers and more for leftover 2020 and 2021 FSA money for employees and ex-employees. Notice 2021-15 answers a lot of the open questions about how to implement the new rules.
For 2021, you can revoke an existing healthcare plan election and make a new election, or revoke an existing election and attest that you’re getting coverage elsewhere. Say you picked an HMO plan, but really want to be in a PPO plan. Or say you decide you’d be better off under a spouse’s plan. This gives you the chance to make a mid-year change. That allowance is not in the December law, so it was a surprise, Mattinson says.
For healthcare and dependent care FSAs, the guidance says employers can allow employees to carryover unused amounts they’ve stashed in these accounts from the 2020 and 2021 plan years. It wasn’t clear before, but the IRS says that any plan can implement a 100% carryover or extended grace period, no matter what feature the plan had before, Mattinson says. That means employees might be able to carry over their whole balance (instead of just $550 under current law) from one year to the next. The extended grace period could go out 12 months, instead of just 2.5 months. as of January 1, 2022, everything would shift back to the regular rules. Under the regular rules, you can stash up to $5,000 pretax per year in a dependent care FSA, but if you don’t use the money for the specified year, you lose it. You can put up to $2,750 in a healthcare FSA, and if you don’t use it, you may be able to either use it up during a grace period or carry over $550.
Don’t get your hopes up just yet: Employers have to adopt these changes, and while some have already been working on amendments to their plans based on the December law even before today’s guidance, others have decided to do nothing. “The reaction among employers is mixed; everyone has their own ideas of what to implement. It’s all optional,” says Mattinson. One client said they would implement it all, while another client said they wouldn’t make any of the changes, for example.
Some of the nitty-gritty guidance surrounds COBRA and health savings accounts. For COBRA, the guidance makes clear that if an employer lets terminated workers seek reimbursement from an FSA, that won’t hurt their qualification for COBRA. For health savings accounts, the guidance clarifies that for employees who want to make a midyear change into a high deductible health plan with an HSA, they could convert a general purpose FSA to a limited purpose FSA so as not to be disqualified from contributing to the HSA.
Notice 2021-15 is 34 pages long and includes detailed examples, suggesting this is an area of the tax code that could be simplified! Here’s a bullet point summary of the law changes addressed in the IRS guidance; employers can:
- allow employees to carry over unused money up to the full annual amount from the plan year 2020 to 2021, and also from the plan year 2021 to 2022 for healthcare and dependent care FSAs
- allow up to a 12-month grace period for employees to incur new expenses and submit claims against unused accumulated funds for plan years ending in 2020 or 2021 for healthcare and dependent care FSAs
- allow midyear election changes on a prospective basis without a change in status event for plan years ending in 2021 for healthcare and dependent care FSAs
- allow dependent care reimbursement up to age 14 in cases where an employee’s dependent turned 13 in 2020 and the employee had leftover funds from 2020 (this special carry forward rule helps employees whose dependents “aged out” during the pandemic) for dependent care FSAs
- allow health FSA participants who stop participating in the plan (ex-employees) during calendar year 2020 or 2021 to continue to receive reimbursements through the end of the year, including grace periods (this post-termination benefit applies to healthcare FSAs, not dependent care FSAs)