February 23, 2021

New IRS Guidance Provides Even More Flexibility for Cafeteria Plans, FSAs, and DCAPs

You might recall that in December 2020, Congress passed the year-end funding bill known as the Consolidated Appropriations Act, 2021 (“CAA”), which contained provisions that provide significant flexibility for flexible spending accounts (“FSAs”) and dependent care assistance plans (“DCAPs”) in 2020 and 2021.  Last week, on February 18, 2021, the IRS released Notice 2021-15 to clarify certain aspects of the CAA and to provide even more flexibility than that provided in the CAA.  Here is a brief overview of both the CAA and Notice 2021-15:


  1. 2020 FSA/DCAP CARRY OVER. For plan years ending in 2020, FSAs and/or DCAPs can allow participants to carryover any unused benefits for contributions remaining from 2020 in to the 2021 plan year.
  2. 2021 FSA/DCAP CARRY OVER. For plan years ending in 2021, FSAs and/or DCAPs can allow participants to carry over any unused benefits or contributions remaining from 2021 into the 2022 plan year.
  3. EXTENDED FSA/DCAP GRACE PERIOD. Employers can extend the FSA or DCAP grace period for the plan years ending in 2020 and/or 2021 to 12 months after the end of the year, with respect to unused benefits/contributions remaining at the end of the year. (This extends the permissible period for incurring claims.)
  4. POST-TERMINATION FSA REIMBURSEMENTS. Employers can allow an employee who ceases participation in the plan during calendar year 2020 or 2021 to continue to receive reimbursements from unused benefits or contributions through the end of the plan year when participation ceased (including any grace period).
  5. SPECIAL DCAP CARRY FORWARD. Typically, expenses may only be reimbursed under a DCAP for a qualifying child who has not attained age 13. Instead of the normal age 13 age limit, the CAA pushes the age limit to age 14 – during the plan year where the end of the regular enrollment period was on or before January 31, 2020 (i.e., enrollment period for 2020 plan year would have been in 2019). AND if there was an unused balance at the end of 2020, age 14 can be used in the 2021 plan year.
  6. PROSPECTIVE MODIFICATION FOR 2021 PLAN YEAR. For the plan year ending in 2021, an FSA or DCAP can allow an employee to make an election to prospectively modify the amount of employee contributions to the arrangement without regard to any change in status.
  7. PLAN AMENDMENT REQUIREMENT. A plan amendment must be adopted by the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective (i.e., if amendment is effective 12/31/20, must adopt an amendment by 12/31/21).

  IRS Notice 2021-15

 IRS Notice 2021-15 restates and clarifies certain aspects of the CAA, and it also provides additional flexibility.  The following outlines most, but not all, of the Notice 2021-15 guidance.

  1. NEW CAFETERIA PLAN FLEXIBILITY. In addition to the CAA changes, this notice provides additional relief for mid-year elections for plan years ending in 2021.  Thus, a plan can allow employees to:
    • NEW ELECTION. Make a new election on a prospective basis, if the employee initially declined to elect coverage.
    • REVOKE ELECITON AND MAKE NEW ELECTION. Revoke an existing election and make a new election to enroll in different coverage prospectively.
    • REVOKE ELECTION IF OTHER COVERAGE. Revoke an existing election on a prospective basis if attest in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer.  Employer must get attestation.
  2. CAN LIMIT FSA/DCAP CARRYOVER. For the carryover authorized by the CAA (described above), an employer may limit the carryover to an amount less than all unused amounts and may limit the carryover to apply only up to a specified date during the plan year.
  3. EVEN IF HISTORICALLY NO CARRY OVER OR GRACE PERIOD. Even if the plan does not typically allow a carry over or have a grace period, it can be amended to add them, per the discussion above.
  4. IMPACTS HSA ELIGIBLITY. The Internal Revenue Code allows eligible individuals to establish and contribute to health savings accounts (“HSAs”).  To be an eligible individual, the individual must (among other requirements) not be covered under any health plan that is not a high-deductible health plan (“HDHP”).  Notice 2021-15 clarifies that the carryover of unused amounts to the 2021 plan year or the 2022 plan year is an extension of coverage by a plan that is not a HDHP. Thus, an individual cannot make HSA contributions during a month in which the individual participates in a general purpose FSA to which unused amounts are carried over.
  5. CAN ALLOW EMPLOYEES TO OPT OUT OF CARRYOVER. Employers may amend their plans to allow employees, on an individual basis, to opt out of the carryover or grace period to preserve HSA eligibility.
  6. CAN LIMIT GRACE PERIOD. Employer can adopt an extended grace period for incurring claims that is less than 12 months and may choose to adopt a period that ends before the last day of the plan year.
  7. CAN LIMIT POST-TERMINATION AMOUNT. For reimbursements that can occur post-termination (see #4 above under CAA discussion), the employer can limit the reimbursement available to only those salary reduction contributions made from the beginning of the plan year to the date the employee ceased to be a participant.
  8. GRACE PERIOD AND POST-TERMINATION. An employer that adopts the extended grace period may also allow employees who ceased participation earlier in the year (see #4 above under CAA discussion) to further extend the period for incurring claims, e.g., John terminated employment in 2020 and his employer extends the grace period for 2020 to the end of 2021 – which would allow John to also incur claims through the end of the extend grace period. But if the employer instead adopted the carryover (and not the extended grace period), John could not take advantage of the carryover.
  9. NORMAL RULES APPLY FOR CARRYOVERS AND GRACE PERIODS IN 2022 OR LATER. After 2022, the normal rules apply for carryovers and grace periods, e.g., the most that an employee may carryover from the 2022 plan year to 2023 is $550.

Brandon Long is an experienced, AV Preeminent-rated employee benefits attorney and a member of McAfee & Taft's Employee Benefits and Executive Compensation Group.

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