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IRS guidance on FSA flexibility under CAA

Health and Benefits
COVID 19 Coronavirus

By Anu Gogna , Benjamin Lupin and Kathleen Rosenow | March 3, 2021

The Consolidated Appropriations Act offers employees flexibility regarding unused amounts in their health and dependent care FSAs through 2021.

The Internal Revenue Service has issued Notice 2021-15 clarifying the flexible spending account (FSA) provisions of the Consolidated Appropriations Act, 2021 (CAA). The CAA provides flexibility for unused amounts in health and dependent care FSAs for 2020 and 2021, among other changes.The FSA changes were designed to help participants with unused balances (such as for childcare expenses that were not incurred during the COVID-19 pandemic) who would normally lose the value of the FSA balance at the end of the tax year (due to the “use it or lose it” rule in the tax code).

Employers may adopt any or all of the relief provided in the CAA at their discretion.


Specifically, the CAA allows the following:

  • Amounts that are unused in 2020 may be carried over to 2021; amounts that are unused in 2021 may carried over into 2022. 
  • Health and dependent care FSA grace periods for plan years ending in 2020 and/or 2021 may be extended for up to 12 months after the end of the plan year.
  • Plan participants who stop participating in the plan during 2020 and/or 2021 (terminated participants) may continue to be reimbursed for eligible expenses through the end of that plan year if they have unused amounts in their health and/or dependent care FSA. 
  • Plan participants may make prospective changes to their health and/or dependent care FSAs during 2021 (regardless of change of status). 
  • Expenses under a dependent care FSA may be reimbursed for dependents who aged out during the COVID-19 pandemic.

IRS guidance

Notice 2021-15 clarifies the following FSA provisions of the CAA:

Increase in carryover of unused amounts and extension of grace periods

  • The relief with respect to an increase in carryover amount or extension of a grace period is available to plans that both do and do not currently have a carryover or grace period (subject to the existing rule that health FSAs may adopt a grace period or carryover, but not both).
  • Dependent care FSAs may adopt a carryover subject to the same rules that apply to health FSAs.
  • Employers may limit the carryover amount to less than all unused amounts and limit the carryover to apply only up to a specified date during the plan year.
  • Employers may choose to adopt an extended grace period of less than 12 months.
  • Individuals may not contribute to an HSA during a month in which they participate in a general purpose health FSA with a carryover, or during any grace period.
  • Employers may amend their plans to allow employees, on an employee-by-employee basis, to opt out of the carryover or extended grace period in order to preserve their HSA eligibility.
  • With respect to the extended grace period, an employer may limit the unused amounts in an employee’s health FSA to the amount of salary reduction contributions the employee had made during the year in which the employee ceased to be a participant (e.g., due to termination of employment, change in employment status or a new election during calendar year 2020 or 2021).
  • Amounts carried over or available during an extended grace period will not be taken into account for purposes of the tax code’s nondiscrimination rules for health FSAs and dependent care FSAs.
  • Unused amounts carried over from prior years or available during the extended grace period will not count toward the annual contribution limit for the following year.

Special age limit relief for dependent care FSAs

  • The CAA increases the maximum age of a dependent for purposes of incurring eligible dependent care FSA expenses to 14 (up from 13) for certain dependent care FSA participants. An employer that adopts the special age limit relief is not required to adopt the carryover or an extended grace period, or vice versa.
  • All amounts from the most recent plan year for which the end of the regular enrollment period was on or before January 31, 2020 (for calendar-year plans, this would be the 2020 plan year), may be applied to dependent care expenses for a dependent who attained age 13 during that plan year.
  • Employers with calendar-year plans may allow employees to carry over all unused amounts from the 2020 plan year to reimburse dependent care expenses during the subsequent plan year (the 2021 plan year) for a dependent who attained age 13 during the 2020 plan year (until that dependent attains age 14) and for a dependent who attains age 13 during the subsequent plan year.
  • This special age limit relief for dependent care assistance programs does not apply to any unused amounts carried over from the subsequent plan year (the 2021 plan year) and does not permit an employer to reimburse expenses for a child who is age 14 years or older.

Cafeteria plan election changes (including changes to health coverage)

  • Employers may permit employees to prospectively revoke an election, make one or more elections, or increase or decrease an existing election regarding their health or dependent care FSA for plan years ending in 2021.
  • With respect to employer-sponsored health coverage, employers may permit employees to prospectively make a new election, change their election to enroll in a coverage option, or revoke their election, subject to a written employee attestation (model language provided in the notice). This relief is similar to previous relief issued in Notice 2020-29.
  • Employers are not required to provide unlimited election changes and may limit the period during which such changes may be made.
  • The plan may provide that amounts contributed before the election is revoked 1) remain available to reimburse medical care expenses or dependent care expenses incurred for the rest of the plan year, 2) be available only to reimburse eligible expenses incurred before the revocation takes effect, or 3) be forfeited.

Changes between HSA-compatible and general purpose FSAs

To preserve HSA eligibility, employers may amend their health FSAs to allow employees to make a midyear election change to be covered by a general purpose health FSA for part of the year and an HSA-compatible health FSA for part of the year (e.g., limited-purpose or post-deductible health FSA). In this case, the employee’s permissible HSA contribution would be based on the months the employee was covered by the HSA-compatible health FSA.

Interaction with COBRA

  • The notice confirms that an individual who is a COBRA qualified beneficiary under a health FSA must still be provided with a COBRA election notice even if he or she has access to unused salary reduction contributions until the end of the year.
  • If an employer adopts an increase in the carryover or extended grace period, those amounts may not be taken into account for purposes of determining the applicable COBRA premium.

Plan amendments

Employers who decide to implement the relief provided in the CAA must adopt an amendment no later than the last day of the calendar year after the end of the plan year in which the amendment is effective. For example, if an employer with a calendar-year plan wants to permit an increase in carryover from 2020 to 2021 (based on unused amounts as of December 31, 2020), it must adopt an amendment by December 31, 2021. However, an amendment for a 2020 plan year of a non-calendar-year plan must be adopted by December 31, 2022.


1 See “2020 year-end COVID-19 stimulus law: Health and benefit implications,” Insider, January 2021

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Senior Regulatory Advisor, Health and Benefits

Senior Regulatory Advisor, Health and Benefits

Senior Regulatory Advisor, Health and Benefits

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