On Dec. 27, 2020, President Trump signed the Consolidated Appropriations Act of 2021 into law. The Act provides temporary special rules for health and dependent care flexible spending accounts (FSAs) that give employees additional time to use these funds, as well as the option for employers to continue to provide paid sick leave (EPSL) and emergency FMLA leave (EFMLA) and receive tax credits for doing so.
Temporary Health FSA and Dependent Care Spending Account Changes
Because of the COVID-19 pandemic, employees may be more likely to have unused amounts in health or dependent care FSAs. For plan years ending in 2020 and 2021, the Act allows employers to:
- Permit employees to carry over all unused amounts remaining in these FSAs to the next plan year (i.e. — from the 2020 plan year to 2021, and again from the 2021 plan year to 2022) not just the normal statutory $550 allowed under current IRS regulations;
- Extend the grace period to 12 months after the end of either or both plan years (2020 and 2021);
- Permit employees who cease plan participation during 2020 or 2021 to continue to receive reimbursements from unused amounts through the end of the plan year in which their participation ended; and
- Permit participants to make changes to election amounts for health and dependent care FSAs for plan years ending in 2021 without a corresponding qualifying life event.
The Act also includes a special carry forward rule for dependent care FSAs where the dependent aged out during the pandemic. For purposes of determining dependent care assistance that may be paid or reimbursed, the maximum age is increased from 13 to 14 years of age. As a reminder, the bill allows — but does not require — employers to amend their plans to permit the changes listed above. To permit any of these changes, sponsoring employers must amend their plans by the last day of the first calendar year beginning after the end of the plan year in which the amendment was effective. For example, to adopt the changes for a plan year ending at any point between Jan. 1, 2021, and Dec. 31, 2021, the employer must amend their plan by Dec. 31, 2022.
FFCRA Tax Credits Extended – but Not Leave Mandate
The Act does not extend the leave mandates created by the EFMLA and the Emergency Paid Sick Leave Act (EPSLA), which expire on Dec. 31, 2020. As a result, the requirement for employers to provide employee paid sick leave and expanded family and medical leave under the Families First Coronavirus Response Act (FFCRA) will end on that date. However, the bill does extend the time limit for employer tax credits for employee leave required by those laws. Specifically, the tax credits will continue to be available for employers that offer EFMLA and EPSLA leave through March 31, 2021. As with the FSA changes listed above, this is permitted and at the discretion of the employer. In summary:
- Offering EPSL and EFMLA leave after Dec. 31 will become optional for employers.
- An employee will no longer be entitled by law to take EPSL or EFMLA leave, even if they have a qualifying reason.
- Employers who choose to offer these paid leaves can still receive a tax credit if they follow the current EPSL and EFMLA leave rules, including job protection.
- The extension of the tax credit will be available for leaves taken through March 31, 2021.
- Employees will not get new hours to use — the unused portion of their original allotment that remains on Jan. 1 is how much they will be able to use through March 31. For instance, if an employee who was entitled to 80 hours of EPSL between April 1 and Dec. 31 used 40 of those hours in 2020, they’d have 40 hours left to use between Jan. 1 and March 31, 2021.
- There is a possible exception when an employee’s EFMLA bank could reset if employers use the calendar year or another fixed FMLA tracking period that starts before March 31, and the Department of Labor (DOL) fails to readopt the regulations they wrote related to EFMLA. We expect the IRS and/or the DOL will provide guidance soon that clears up whether certain employers will need to offer additional hours.
Higginbotham will continue to monitor the situation and provide any updates from the DOL or IRS as they are released.