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IRS Guidance on Additional Flexible Spending Account and Mid-Year Election Relief Under Cafeteria Plans in 2021 and 2020 

by Patterson Belknap Webb & Tyler LLP

Published: March, 2021

Submission: March, 2021


On February 18, 2021, the IRS issued Notice 2021-15, which provides guidance with regard to a number of provisions of the temporary changes to the rules related to the operation of health and dependent care flexible spending accounts that were included as part of the Consolidated Appropriations Act, 2021 (the “New Law”), and also provides for an additional exception from the standard rules regarding Section 125 plan (often referred to as cafeteria plans or flexible benefits plans) election changes not found in the New Law. This alert reviews the changes made in the New Law, and highlights some of the additional guidance included in Notice 2021-15. (Our initial alert regarding the FSA-related provisions under the New Law is linked here.) The changes made by the New Law and the additional exception from standard rules provided under Notice 2021-15 with regard to election changes all continue to reflect optional provisions that plans can offer; the changes are not required to be implemented.

Carryover Expansion

Under the New Law, plan sponsors may amend their plans to permit employees to carry over any unused amounts under both health and dependent care FSAs from the plan year ending in 2020 to the plan year ending in 2021 and any unused amounts from the plan year ending in 2021 to the plan year ending in 2022. These carryover amounts are not limited by the current $550 cap that applies to carryovers from health FSAs. Notice 2021-15 confirms that, as with the previously permitted, more limited carryover amounts available for health FSAs, this carryover will not reduce the salary reduction limit otherwise applicable to the plan year following the plan year in which the carryover was utilized.1

A plan sponsor is permitted to require that a participant enroll in the health or dependent care FSA with a minimum election amount to have access to the carried over amounts permitted under the New Law. A plan sponsor can also limit the period during which the carried over amounts can be utilized – and require that they be utilized before a specified date earlier than the end of the year to which they are carried over

Notice 2021-15 continues to apply prior guidance that if an amount from a general purpose health FSA is made available as a general purpose health FSA providing benefits in a later year because of a carryover of unused amounts, a plan participant would not be eligible to contribute to a health savings account (HSA) while covered by the general purpose health FSA. However, as with other carryovers, a plan could provide that a health FSA would provide only limited benefits (and become a limited purpose FSA) with regard to the carried over funds for participants who have elected high deductible health plan coverage in order to enable eligibility for HSA contributions by or for those participants for the period during which the carried over funds can be utilized. A plan sponsor could also enable plan participants to opt out of carryover of unused general purpose health FSA balances or permit participants to make a mid-year election change to be covered by a limited purpose health FSA for the remainder of the year to preserve HSA eligibility.

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