Historically, the flexible spending account has been a “use it or lose it” account, but a new law is allowing employees to hold on to their money for an additional year.
The Consolidated Appropriations Act was passed by Congress and signed by President Trump in December. Going on record as the longest bill ever passed by Congress (a whopping 2,124 pages), the legislation was designed to provide Americans with financial relief from the pandemic.
Employers need to know about one change in particular: the bill temporarily amended FSA guidelines to provide employees with another cash flow source. Executives at financial services company, HealthEquity, said it's in advisers’ best interests to bring their clients up to speed on the changes now.
“I encourage [advisers] to be as flexible as you can, and sit down with your employers to think about overall compensation strategy,” said Jody Dietel, senior vice president of advocacy and government affairs at HealthEquity, during a webinar. “Employers still have time to process the changes, but they need to understand how they’ll affect their benefit plans.”
Under the changes, employees with health or dependent care FSA accounts have until the end of 2021 to spend their funds. That includes employees who were laid off during the pandemic.
“A lot of employers had to let people go; unemployment was high in the whole nation,” Dietel says. “Congress decided they shouldn’t lose access to their funds during the economic fallout.”
The one-year extension provides employers with two options: unlimited carryover of funds, or a 12-month grace period. Employers should choose based on whether or not their workforce also
“With carryover, you can redirect [FSA] funds to an FSA-compatible HSA account,” Dietel says. “That way, carryover funds can be used at any time for dental and vision expenses once the deductible is met. You want to preserve the members’ ability to save like this.”
Limited purpose FSAs and post-deductible FSAs are both compatible with HSA accounts, she says.
However, plan participants who don’t have an HSA would benefit from the new 12-month grace period. Before the bill was passed, most FSA compatible plans offered a two to three month grace period. Now, plan participants have until Dec. 31, 2021 to spend the funds leftover from 2020 — after which, they’ll expire.
The new law also allows plan participants to alter their FSA contributions before open enrollment — the requirement to meet a qualifying event is suspended for one year.
“It’s meant to help soften the blow from COVID-19,” Dietel says.
The legislation also made major changes to the dependent care FSA to
“We’re all aware COVID had a major impact on families,” said Fran Scott, director of compliance services at HealthEquity, during a webinar. “Congress wanted to make sure members could use these funds even though their kids aged out of the program at 13.”
To help parents maintain social distancing while working remotely, Congress also included amendments that allow them to use dependent care FSA dollars on virtual daycare and independent support companies. Both the age limit and program expansions will expire on the last day of the year.
“Unfortunately it’s usually tough to get those programs to qualify as child care, but the provision to change the age also addressed this concern,” Scott said.
Employers have until Dec. 31, 2021 to document changes to their plans. Dietel and Scott recommend that brokers sit down with their clients to discuss these changes.
“While employers have to make decisions now, they have all sorts of time to document their plan,” Dietel says.
