Relief Provided From Flexible Spending Account “Use It or Lose It” Rule

December 29, 2020 | Insights

By Greta Cowart

As the last few days of the last plan year ending in 2020 come to a close, the Consolidated Appropriations Act, 2021 (the “Act”) makes a big change for all flexible spending accounts with a plan year ending in 2020 on or before December 31, 2020, to permit the unused amounts in such flexible spending accounts to carry over to the next plan year that ends in 2021. So if a calendar year health flexible spending account or dependent care flexible spending account had $800 remaining as of December 31, 2020, and had not further claims incurred before December 31, 2020, to use against such amounts, the plan may allow the participant to carry over such unused amounts into the 2021 plan year and use the carryover amounts to reimburse claims incurred in 2021.

While many plans have already had annual enrollment for 2021 so that participants cannot change elections to address these new permissive carryovers, the Act also permits unused amounts from 2021 to be carried over to 2022. In addition, the Act permits employers to allow elections to be changed by participants during plan years ending in 2021 to alter the employee’s contribution toward their 2021 health flexible spending account and dependent care flexible spending account. The Act did not alter the annual limitations on contributions to either health flexible spending accounts or dependent care flexible spending accounts to accommodate any amounts carried over. As a result, a participant, believing he or she had lost unused amounts from the 2020 plan year may have elected to contribute the full amount (up to the limit) for 2021 and may need to make an election change for 2021 if the employee learns the employer is permitting the carryover of unused amounts, provided the employer also adopts the flexibility to make mid-year changes for the plan year ending in 2021.

For flexible spending account plan years ending in 2020 or 2021, if the flexible spending account uses grace periods, those grace periods for 2020 and 2021 may extend to up to 12 months following the end of the plan year. This means an employee with amounts in his or her health flexible spending account at December 31, 2020, if the employer adopts the extended grace period, may incur medical expenses at any time in 2021 during the 12 months following December 31, 2020, and use those expenses against the unused account balance at December 31, 2020.

The Act also provides a special rule for participants in a health care flexible spending account when the participant’s employment terminates during the 2020 or 2021 calendar year, which may permit submission of expenses incurred post-termination of employment against unused amounts in the participant’s health care flexible spending account.

The Act also considered the fact that some dependents attained the limiting age for dependent care expense flexible spending account reimbursement during the pandemic by raising the limiting age from 13 years to 14 years for plan years for which their annual enrollment period was on or before January 31, 2020, and during which the dependent child attained the age of 13. So if an employee elected in annual enrollment during November 2019 to contribute $5,000 to his or her dependent care flexible spending account and his or her child turned 13 in October 2020, dependent care expenses for that child will not end when the child turned 13, but will continue to be eligible for submission and reimbursement until that child attains the age of 14 in October 2021. This provides relief to individuals who did not incur expected dependent care expenses in 2020 when schools and dependent care services were closed and had a child attain the limiting age of 13 so that they can recover in the next following plan year for dependent care expenses incurred.

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