IRS Releases Guidance on Additional Section 125 Relief Provided by the CAA 2021

• A plan cannot adopt both a carryover and an extended grace period for the same plan year, consistent with general rules, with respect to health FSAs and DCAPs. Further, any health FSA or DCAP can adopt an extended grace period or carryover, even if the plan did not previously offer such provision.
• An employer may choose to adopt an extended grace period less than 12 months in length. Similarly, an employer may choose to limit the carryover amount to less than the entire unused account balance, and may limit the carryover to apply only up to a specified date during the plan year.
• Prospective election changes may include an initial election to enroll in a health FSA or DCAP, which means that participants who initially waived coverage could make a new election to enroll mid-year without a qualifying life event. An employer may even permit employees to switch from a general-purpose health FSA to an HSA-compatible FSA (e.g., limited-purpose dental/vision or post-deductible FSA) mid-year.
• A plan may limit the time frame for which mid-year election changes may be made. Likewise, a plan can limit the number of mid-year election changes permitted without a qualifying life event.
• Plans may limit post-termination participation in a health FSA to employee contribution amounts made during the plan year prior to termination (also known as the health FSA spend-down provision). In addition, this option is available to participants who cease participation in a health FSA as a result of termination of employment, change in employment status (such as a furlough), or a new election during calendar year 2020 or 2021.
• The special age limit relief for certain dependents who turned age 13 during the plan year is separate from the carryover and extended grace period relief. An employer that adopts the special age limit relief does not have to adopt the carryover or an extended grace period for employees to continue to use funds remaining from the previous plan year for such children.
• Plans are permitted to allow participants to make mid-year election changes for employer-sponsored health coverage for plan years ending in 2021. Similar to earlier guidance provided in 2020 via IRS Notice 2020-29, a plan may permit employees to, on a prospective basis, make a new election if originally declined coverage, or revoke an existing election and make a new election to enroll in another group health plan sponsored by the same employer or other health coverage not sponsored by the employer (as long as that employee provides a written attestation to verify that the employee is or will be enrolled in coverage not sponsored by the employer).

Importantly, employers may choose to implement this relief, but are not required to do so. However, if employers do implement any or all of this relief, then plan amendments are required, although the amendments can be retroactive as long as they are completed by the last day of the calendar year following the end of the plan year in which the change is effective (and, in the meantime, the plan operates in accordance with the terms of the amendment). This means amendments to plan years ending in 2020 would have to be completed by December 31, 2021.

We continue to review the new guidance and further details are forthcoming. For additional information, see IRS Notice 2021-15. In addition, for details regarding the relief provided initially by the CAA, see NFP’s Consolidated Appropriations Act of 2021: Summary Overview of Benefits Provisions.
 

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