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IRS Relaxes Mid-Year FSA Elections, Extends Grace Period

May 15, 2020

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On Tuesday, May 12, the IRS published additional COVID-19 guidance for employer-sponsored healthcare benefits.  Drafted to address unanticipated changes in medical and childcare costs due to the COVID-19 emergency, the two Notices relax mid-year election changes for health Flexible Spending Accounts (FSAs) and Dependent Care Assistance Programs (DCAPs). They also provide more flexibility in grace periods for both types of accounts and increase the maximum annual carryover amount for health FSAs.

Since March, the federal government has released several relief measures for healthcare benefits to assist American companies and workers handle the economic stress caused by COVID-19. Among the measures are the CARES Act passed in March, and COBRA and claims run out extensions announced in April.

Cafeteria Plan, Health FSA and DCAP Elections

COVID-19 Guidance for Mid-Year Elections

Outlined in Notice 2020-39, employers may choose to amend health FSA and Dependent Care FSA plans that begin in 2020 to allow for changes to annual elections or allow new elections. Employers are not required to immediately amend their plans and have the ability to limit how many changes are allowed.

Employers may allow employees to do the following:

  • Make a new election, even if the employee had previously declined
  • Revoke an existing election and make a new election in a different health coverage offered by the employer (with written intent from the employee)
  • Revoke an existing election and make a new election in a plan not offered by the employer
  • Increase, decrease, make a new election or revoke an existing election for a health FSA
  • Increase, decrease, make a new election or revoke an existing election for a Dependent Care FSA (DCAP)

Mid-year elections cannot be retroactive to allow for refunds. If a participant had already contributed $1,000 to their FSA, they may decrease their election to that amount; they are not allowed to decrease the election to less than $1,000 and get a refund. Also, employees can not reduce their election below money they have already spent.

Prior to this guidance, with a health FSA, participants could only change their elections due to specific “qualified” life events; these include an update in marital status, addition or loss of a dependent, change in employment status or becoming eligible for Medicare or Medicaid. For Dependent Care FSAs, participants could update elections based on changes to care costs and care provider closings, among other reasons.

Extended Grace Period for Health FSAs and DCAP

A grace period is a pre-defined time frame after the plan year ends that enables participants to spend down any remaining balance from the previous year. For plans on the calendar year (January 1 – December 31), grace periods often ended March 15 of the following year.

COVID-19 Grace Period Extension

Employers may now amend their plans to allow for beneficiaries to use their unused health FSA, Dependent Care FSA, or Limited Purpose FSA funds. The guidance applies to grace periods ending in 2020 or a plan year ending in 2020, allowing the spending extension to end December 31, 2020. If an employer’s plan does not have a grace period in 2020, it may choose to extend the plan year to December 31, 2020.

IMPORTANT NOTE: An employer that chooses to adopt the grace period extension will cause an employee to be ineligible for an HSA through at least December 31, 2020.

Health FSA Carryover

In Notice 2020-33, the IRS also updated guidelines for FSA carryover. Since 2013, health FSA participants could carryover a maximum of $500 in unused funds to the following year. The amount was based on 20 percent of the maximum annual election (in 2013, it was $2,500).

Beginning with 2020 plan years, FSA participants may now carryover a maximum of $550 to the next year. Going forward, the carryover amount will be indexed to the maximum annual elections in increments of $50.

Amendment Dates

Employers have until December 31, 2021 to amend their plans in order to adopt the changes for mid-year elections, extended grace periods, and increased carryover.

To amend your plan, please contact us today at or 866-403-9378.

This analysis was written by DataPath with assistance from the Employers Council on Flexible Compensation (ECFC), the Society of Professional Benefit Administrators (SPBA), and Alston & Bird.