If you had a health or dependent care FSA in 2020, there is some good news. Just prior to the new year, the Consolidated Appropriations Act, 2021 (often referred to as the second COVID stimulus bill) was passed into law on December 27. This bill could provide a lot of relief for working adults with a Flexible Spending Account (FSA), especially those with an unused balance from last year. The legislation includes temporary carryover, spend down, and dependent rules (among several others) for health and dependent care FSAs.
One important thing to know is that your employer is not required to adopt the new rules; if they do, they must update their benefits plan to allow for the changes. Each employer has the option to adopt one or more of the following provisions, or to allow none at all.
Health and Dependent Care FSA Carryover
Health and dependent care FSA plans can now carryover ALL remaining balances from 2020 to 2021, and then again from 2021 to 2022.
Earlier in 2020, the IRS updated the rules to increase the maximum health FSA carryover from $500 to $550. Traditionally, a dependent care FSA (also known as a Dependent Care Assistance Plan, or DCAP) plan does not allow for carryover of unused funds.
Extended Grace Period
Employers can now permit a 12-month grace period for unused balances or contributions for health and dependent care FSAs for 2020 and 2021 plan years.
Typically, a grace period lasts a maximum of two and a half months.
Health FSA spend down
If you had a health FSA and lost your job in 2020 (or in 2021), you may be able to use that FSA money. If your employer plan allows, you could spend down the available balance.
In a normal year, losing your job would mean you leave your contributions behind, with some exceptions.
Extra Year of DCAP Eligibility
You can use your dependent care FSA to pay for qualified expenses through your dependent child’s 14th birthday. If you carry over any balance from 2020 to 2021, the age 14 rule applies to that money as well.
Generally, you can only use DCAP for children age 0-12 years (not yet reached their 13th birthday).
Flexible Mid Year Elections
For 2021, you can update your annual election amount for your health or dependent care FSA for any reason at any time, without a qualifying life event.
Under normal rules, you could only update your health FSA if you had a change in family status (i.e., marriage/divorce/new child) or a change in employment status. For dependent care FSAs, you could make a change if your child care situation changed.
Talk to your employer
Remember, these changes are allowed but are not mandatory for employers. Please talk to your HR or benefits manager to see if your company will help you get the most out of your 2020/2021 health and dependent care FSA!
Captain Contributor is a multi-award winning employee education program. The program includes blogs, videos, social media, and more, focused on tax-advantaged healthcare benefits.