IRS issues implementation guidance for FSAs as part of COVID-19 relief

Flexible spending account (FSA) rule changes now permit carryover amounts through 2022, new benefit election flexibility, and other changes intended to help employees with health costs during the COVID-19 outbreak. The changes aren’t mandatory and must be implemented by employers. If you offer health FSAs and/or dependent care assistance programs (DCAPs), you should become familiar with the new options and how they may affect employees.

How we got here

Late in 2020, the Consolidated Appropriations Act (CAA) of 2021 was enacted, creating new options for health and dependent care FSAs and extending some of the earlier COVID-19 relief changes implemented in May 2020. In response to the CAA, the IRS issued Notice 2021-5 on February 18, 2021, providing employers with detailed implementation guidance.

Notice 2021-5 and the CAA create the following options for health and dependent care FSAs.

Carryover amounts unlimited, grace period extended

Last May, the IRS released two emergency notices permitting employees to adjust their pretax contributions to FSAs during 2020. The guidance also increased the carryover limit for the accounts with grace periods ranging from $500 to $550 and lasting until the end of 2020.