Open Enrollment: How Do I Answer Employees’ FSA Questions?

As the COVID-19 pandemic put the brakes on many individuals’ spending for health and dependent care expenses this year, the IRS responded in May with relaxed rules for cafeteria plans that include flexible spending accounts (FSAs) for dependent care and healthcare expenses. While employers and account holders welcomed the relief, it is limited and generally applies only for 2020, rather than through 2021.

Now that open enrollment season is upon us, employers should expect more questions than usual about the potential for forfeitures of 2020 funds and planning FSA elections for 2021 during these uncertain times. Take this opportunity to remind employees about the basics of your plan design so they can use up their funds before the end of the plan year and make decisions for 2021. And while we’d like to see FSA relief extended into 2021, employees need to make their open enrollment decisions based on the standard rules in case relief doesn’t come.

It’s a good time to let employees know if your dependent care FSA has a grace period, a run-out period, or both. Explain that a grace period allows an additional 2-1/2 months to incur claims, while a run-out period only provides additional time to submit claims, not incur them. Remind employees that they can make a prospective election change to their dependent care FSA based on what the IRS calls “significant cost or coverage changes.” So an employee would be permitted to decrease his or her dependent care FSA election for the year when a daycare closes, or increase his or her dependent care FSA election when a parent returns to the workplace and is unable to care for the child at home. Either of these events could allow the employee to change his or her election amount for this year, even without additional regulatory relief.

Since the IRS rules for midyear election changes to health FSAs are much more stringent than they are for dependent care FSAs, it is even more crucial that employees make an informed decision when deciding how much to contribute to a health FSA for 2021. They aren’t allowed to make Health FSA prospective election changes due to “significant cost or coverage changes.” Tell employees if the plan has a grace period for incurring claims or allows a carryover of unused funds to the next plan year. If your health FSA allows a carryover, is the maximum carryover amount $550 or less? Knowing all of these details will help employees use up their 2020 funds and plan for 2021.

Beyond helping your employees through open enrollment, keep an eye on what’s happening in Washington, DC. Plan sponsor groups are continuing efforts to convince regulators and Congress to provide additional flexibility for next year, but the outlook is uncertain.

Hopes that Congress would increase the amounts of unused FSA funds or benefits that could be carried over into 2021 as part of COVID-19 relief legislation have dimmed now that talks between Hill Democrats and the White House on a relief package have stalled. While a deal during the lame duck session is possible, the scaled-back relief bill (the HEROES Act) passed by the House last week omits provisions from the version passed in May that would have given more flexibility to cafeteria plans and health and dependent care FSAs.

In the event that Congress determines that additional FSA flexibility is warranted as part of any compromise measure, however, lawmakers could look to a provision included in both the first House-passed HEROES Act from Democrats and in a bill from Senate Republicans. The provision would allow up to $2,750 in unused health FSA funds and up to $5,000 in dependent care FSA funds to be carried over and used in 2021.

While the outlook for the substance and timing of any health care legislation this year is uncertain, plan sponsor groups will keep pushing for these HEROES Act provisions as well as additional regulatory relief from the IRS for health and dependent care FSAs.

The American Benefits Council (ABC), for example, is urging to the IRS to extend previously granted relief through 2021 as soon as possible. ABC is also asking for special rules to protect the HSA-eligibility of employees offered an extended claims period under a health FSA. The group also is requesting that employers be allowed to provide employees the ability to cash-out health and dependent care FSAs upon termination of employment, and that employers be allowed to provide cash-outs of commuter benefits as well, including upon termination of employment.

Consistent with the earlier relief provided by the IRS, ABC is stressing to regulators that its requests are for additional flexibility for employers and that whether and how to provide the relief to employees should be left to employers’ discretion. 

It remains to be seen how and when the IRS may respond, but there is cautious optimism in the plan sponsor community that some relief for 2021 may be in the offing from regulators if not from Congress. Stay tuned.

Geoff Manville
by Geoff Manville

Partner, Mercer’s Law & Policy Group

Andrea Alarcon
by Andrea Alarcon

Senior Associate, Mercer

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