IRS Issues New FSA Rules

The IRS is providing more flexibility on health flexible spending arrangements (FSAs) or dependent care assistance programs. Under the COVID-related Taxpayer Certainty and Disaster Tax Relief Act of 2020, these plans now have additional discretion in 2021 and 2022 to adjust their programs to help employees better meet unanticipated consequences of pandemic.

As a result of COVID-19, participating employees are more likely to have unused health FSA amounts or dependent care assistance program amounts at the end of 2020 and 2021. Generally, under these plans, an employer allows employees to set aside a certain amount of pre-tax wages to pay for medical care and dependent care expenses.

Notice 2021-15 provides flexibility for employers in the following areas:

Flexibility to carryover unused amounts from 2020 and 2021 plan years

Flexibility to extend the permissible period for incurring claims for plan years ending in 2020 and 2021

Flexibility to adopt a special rule regarding post-termination reimbursements from health FSAs

Flexibility for a special claims period and carryover rule for dependent care assistance programs when a dependent "ages out" during the COVID-19 public health emergency

The ability to allow certain mid-year election changes for health FSAs and dependent care assistance programs for plan years ending in 2021.

The decision to adjust these employee benefit programs is at the discretion of the employer sponsoring the plan.