12 Jan New creative use of Flexible Spending Accounts (FSAs)
By Grant Dattilo
Employers are just beginning to learn about a Flexible Spending Account (FSA) provision in the new Covid-19 relief law from which their employees might benefit. Congress passed the December 2020 “Consolidated Appropriations Act, 2021” (HR133) purportedly to stimulate the U.S. economy because of the negative effects of Covid-19. It passed the House 359-53 and the Senate by 92-6.
Few people know of all the provisions in the 2124-page bill. It brings to mind the famous quote of Speaker Nancy Pelosi when the Affordable Care Act had passed: “We had to pass the bill so we could find out what was in the bill.”
Most Americans paid attention to the individual stimulus checks – $600 per person, and $600 for each dependent child – for those with qualifying incomes. (We don’t speculate here on what the new Congress and President might do about Covid-19 stimulus checks.)
The bill includes several optional extensions that effect FSAs. The new law “…allows those who have FSAs to roll over the remainder of their accounts from 2020 to 2021 and from 2021 to 2022.”[i]
Previously, individuals with FSAs drained those accounts at the end of the year as a result of the “use it or lose it” provisions. Under the new law, they will be able to roll over unspent monies for up to two years.
Provided the employer chooses to permit it, employees may now:
- Carryover unused FSA funds from the plan year ending in 2020 to the plan year ending in 2021.
- Carryover unused FSA funds from the plan year ending in 2021 to the plan year ending in 2022.
- Take advantage of a grace period that extends paying down the funds in their FSA for the plan years ending in 2020 or 2021 for up to 12 months after the end of the plan year.
FSA account holders will also be able to better manage their tax-preferred FSA contributions to help eligible dependents. “Congress also increased the age for dependent children from under 13 to under 14…”[ii] and created more opportunity to help elder dependents with FSA funds.
Changes to the current FSA plans will have to be made “by the end of the first calendar year beginning after the end of the plan year in which the amendment is effective, provided the plan must be operated consistent with the terms of the amendment beginning on its effective date.”[iii] For example, amendments to the FSA for a plan year of January through December 2020 must be made by December 31, 2021. A plan year running from July 1, 2020 through June 30, 2021, would have to be adopted by December 31, 2022. [iv]
Seek Advice and Counsel
Employers should not try to implement the new FSA guidelines without professional advice. FSA regulations are complex. Employers should consult their tax accountant and legal counsel for definitive compliance guidelines. Then contact a qualified group insurance consultant to implement a plan.
[i] Malito, Alessandra. “COVID Relief Bill Will Let FSA Money Roll over into 2021 — a Win for Parents and Those with Live-in Elderly Loved Ones.” MarketWatch. Accessed January 5, 2021. https://www.marketwatch.com/story/covid-relief-bill-will-let-fsa-money-roll-over-into-2021-a-win-for-parents-and-those-with-live-in-elderly-loved-ones-11608825806.
[iii] Staff. “FSA Relief Included in COVID Bill Passed by Congress.” DBIWebsite, December 22, 2020. https://www.discoverybenefits.com/blog/posts/2020/12/22/fsa-relief-included-in-covid-bill-passed-by-congress.