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Top 10 Issues Resolved in IRS FSA Relief Guidance

The IRS has issued much-anticipated guidance clarifying certain aspects of the FSA relief provisions enacted at the end of 2020.

The full guidance is available here:

  • https://www.irs.gov/pub/irs-drop/n-21-15.pdf

This post highlights the Top 10 issues addressed by the IRS in this new guidance:

  • Key Issue #1: Carryover Amounts Do Not Affect FSA Contribution Limits
  • Key Issue #2: HSA Eligibility—Health FSA Carryover
  • Key Issue #3: HSA Eligibility—Health FSA Grace Period
  • Key Issue #5: HSA Eligibility—Revocation of Health FSA Election
  • Key Issue #4: Limiting Health FSA Spend Down Access to YTD Contributions
  • Key Issue #6: Prospective Election Change Relief Not Limited to FSAs
  • Key Issue #7: Limiting Election Reductions to Amounts Already Reimbursed
  • Key Issue #8: Cafeteria Plan Retroactive Amendment Deadline
  • Key Issue #9: The Odd Dependent Care FSA Age Limit Increase to Age 14 in 2020
  • Key Issue #10: Employer-Imposed Restrictions on Relief Permitted

CAA Included Major Health FSA and Dependent Care FSA Relief Related to Covid

The massive Consolidated Appropriations Act, 2021 (CAA) enacted at the end of 2020 included major health FSA and dependent care FSA relief that employers may offer to address changed circumstances caused by the pandemic.

In short, those CAA FSA relief provisions include:

  • Full FSA Carryovers from 2020-2021 and 2021-2022 Plan Years: For both the health FSA and the dependent care FSA, the plan may permit carryovers of the full unused balance from plan years ending in 2020 and 2021 into the subsequent plan years ending in 2021 and 2022, respectively.
  • Extended Grace Periods for 2020 and 2021 Plan Years: For both the health FSA and the dependent care FSA, the plan may have a 12-month grace period after the plan years ending in 2020 or 2021.
  • Health FSA Spend Down: Similar to the spend down option available under the dependent care FSA, the health FSA may permit employees who terminate participation mid-year during calendar year 2020 or 2021 to continue to incur reimbursable claims for the remainder of the plan year in which participation ceased.
  • Dependent Care FSA Relief for Children Who Reached Age 13: Employees whose children reached age 13 during the last dependent care FSA plan year for which the enrollment period was on or before January 31, 2020 (or in the subsequent plan year with respect to unused amounts) may continue to treat the child as eligible up to age 14 for such plan year.
  • FSA Election Change Relief: Building on the prior IRS election change relief for 2020, the CAA provides that the cafeteria plan may permit employees to change their health FSA or dependent care FSA election during plan years ending in 2021 without experiencing a permitted election change event.
  • Plan Amendments May be Retroactive: Employers wishing to offer any of these optional FSA relief provisions must amend the Section 125 cafeteria plan to incorporate the changes. The amendment may be retroactive as along as it is adopted no later than the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective, and the plan is operated consistent with the terms of the amendment during the full retroactive period.

For full details, see:

 Top 10 Issues Resolved in New IRS FSA Relief Guidance

  • Key Issue #1: Carryover Amounts Do Not Affect FSA Contribution Limits

Previous IRS Guidance

Although this was not a concern for the health FSA carryover (because it already has established rules), the introduction of the dependent care FSA carryover option created novel questions as to whether the amount carried over would affect the employee’s ability to elect to contribute the $5,000 maximum to the dependent care FSA.  The IRS had not addressed this issue previously because the carryover was not available for a dependent care FSA.

New IRS Guidance

The new IRS guidance confirms that amounts carried over into subsequent plan years under the health FSA and dependent care FSA affect the employee’s election limit for the subsequent plan year. (Page 24)

Practical Result

Employees can elect up to the full $2,750 limit under the health FSA or $5,000 limit under the dependent care FSA for the 2021 plan year even if they are carrying over amounts from the 2020 plan year.

  • Key Issue #2: HSA Eligibility—Health FSA Carryover

Previous IRS Guidance

IRS guidance issued in 2014 confirmed that employers may design the health FSA carryover provision to provide that employees enrolling in an HDHP plan option for the subsequent plan year will automatically have their carryover balance converted to limited purpose to preserve HSA eligibility.

New IRS Guidance

The new IRS guidance confirms that the same health FSA carryover automatic conversion to limited purpose option (or employee opt-out of the carryover) remains available to preserve HSA eligibility under the CAA full carryover provisions.  (Pages 8-9, 26)

Practical Result

Employees enrolled in an HDHP plan option with a general purpose health FSA carryover balance—even if in excess of the standard $550 carryover limit—can have the carryover balance automatically converted to limited purpose to preserve their HSA eligibility.

  • Key Issue #3: HSA Eligibility—Health FSA Grace Period

IRS guidance issued in 2007 confirmed that a health FSA grace period does not block HSA eligibility for employees who spend down the health FSA to zero by the last day of the plan year.  The account balance must be zeroed out on a cash basis no later than the last day of the plan year to qualify—claims incurred/submitted but not yet reimbursed do not affect the determination.

Previous IRS guidance issued in 2005 provided a rarely-utilized limited purpose conversion option permitting the health FSA convert all general purpose grace period balances to limited purpose.  Although this preserves HSA eligibility during the grace period, almost no employers adopted the approach because it requires that the grace period amount be converted to limited purpose for all health FSA participants—even those who are not moving to HDHP coverage for the next plan year.

New IRS Guidance

The new IRS guidance states that the health FSA may be structured to provide that only employees enrolling in an HDHP plan option for the subsequent plan year will automatically have their grace period balance converted to limited purpose to preserve HSA eligibility. Alternatively, employees can choose to opt-out of the grace period to preserve HSA eligibility, such as where the employer does not offer a limited purpose option. (Pages 11, 26)

Practical Result

Employees enrolling in an HDHP plan option with a general purpose health FSA grace period balance can have the carryover balance automatically converted to limited purpose to preserve their HSA eligibility.

This significantly improves the grace period HSA eligibility integration and aligns the approach more closely to how the rules have subsequently developed for the carryover.

  • Key Issue #4: HSA Eligibility—Revocation of Health FSA Election

Previous IRS Guidance

IRS guidance issued in 2005 confirmed that employees who are covered by a general purpose health FSA (whether through their employer or a spouse’s) are not HSA eligible.  Individuals are covered by a general purpose health FSA—and therefore blocked from HSA eligibility—when they can incur reimbursable claims under the health FSA.

New IRS Guidance

The new IRS guidance confirms that  where the health FSA is structured not to permit reimbursement of expenses incurred on or after the effective date of the employee’s election to revoke the health FSA, employees will not have disqualifying coverage that blocks their HSA eligibility for months after the effective date of the health FSA election revocation. (Page 25)

Practical Result

Employees who take advantage of the election change relief to revoke their health FSA election and enroll in HDHP coverage will be able to make and receive HSA contributions (assuming they have no other disqualifying coverage) for all remaining months in the plan year.  The one caveat is the health FSA must not permit post-revocation claims to be eligible for reimbursement for this to be a viable option.

  • Key Issue #5: Limiting Health FSA Spend Down Access to YTD Contributions

Previous IRS Guidance

Proposed Section 125 regulations and IRS guidance issued in 2010 confirmed that the health FSA “uniform coverage rule” requires the full amount of a participant’s election be available for reimbursement at all times during the plan year.  Unlike the dependent care FSA, the health FSA cannot base its reimbursements to an employee on what that employee may have contributed up to any particular date, including the date the employee terminates.

IRS guidance previously confirmed that a cafeteria plan may provide for a spend down provision for the dependent care FSA—but not the health FSA—allowing terminated participants to continue incurring reimbursable claims through the end of the plan year in which participation ended.

The CAA FSA relief provides that employers may offer a health FSA spend down provision for employees who terminate participation during calendar year 2020 or 2021 “under rules similar to the rules applicable to dependent care flexible spending arrangements.”

New IRS Guidance

The new IRS guidance confirms that employers may limit the amount available to terminated health FSA participants in the spend down period to only the amount contributed to the health FSA prior to termination.  This is a key exception from the uniform coverage rule that makes the feature viable for the health FSA by aligning it with the existing dependent care FSA rules. (Pages 11-12)

Practical Result

Where employers offer the health FSA spend down provision, the plan can provide that terminated employees are able to incur reimbursable claims through the remainder of the plan year only up to the amount of their pre-termination contributions.

Note: Terminated employees with an underspent account wishing to access their full health FSA election balance post-termination can continue health FSA coverage through COBRA.

Previous IRS Guidance

The general rule is that Section 125 cafeteria plan elections are irrevocable for the duration of the plan year absent a permitted election change event.

For more details:

Previous IRS guidance provided that employers could amend their Section 125 cafeteria plan to allow employees to make prospective mid-year election changes during calendar year 2020 without experiencing a permitted election change event.  This CY 2020 relief extended beyond FSA elections to also include medical, dental, and vision plan coverage.

For more details:

The new CAA FSA relief provides that for plan years ending in 2021, the cafeteria plan may permit participants to prospectively change their health FSA and/or dependent care FSA elections without experiencing a permitted election change event.  The CAA relief did not extend to health plan elections.

New IRS Guidance

The new IRS guidance extends the same broader health plan election change relief from calendar year 2020 to also apply to plan years ending in 2021. (Pages 20-22)

This allows employers to amend their Section 125 cafeteria plan to offer employees the following health election changes for plan years ending in 2021 without experiencing a permitted election change event:

  • Waived Employees Enroll Mid-Year: Make a new election to enroll mid-year in medical, dental, or vision coverage on a prospective basis;
  • Mid-Year Plan Option Change or To Add Dependents: Change medical, dental, or vision plan options mid-year, or enroll dependents into such plan options mid-year, on a prospective basis;
  • Mid-Year Dropping of Health Plan Coverage: Revoke medical, dental, or vision plan elections on a prospective basis, provided the employee attest in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer.

The Notice provides template language on pages 21-22 that employers can use for the employee’s written attestation, which employers may rely on this written attestation provided by the employee unless the employer has actual knowledge that the employee is not (or will not be) enrolled in other comprehensive health coverage not sponsored by the employer.

Practical Result

Where employers adopt the FSA election change relief for plan years ending in 2021, employees may make a prospective mid-year election to change their health FSA and/or dependent care FSA elections without experiencing a permitted election event.  This includes any mid-year election to enroll in, increase, decrease, or revoke health FSA or dependent care FSA participation.

Where employers adopt the new additional health plan election change relief for plan years ending in 2021, employees will have the option to change their medical, dental, or vision cafeteria plan elections (i.e., the election to pay the employee-share of the premium for such coverage on a pre-tax basis) without experiencing a permitted election change event.

IMPORTANT NOTE: This relaxed mid-year election change approach for health plans addresses only the ability of employees to pay the employee-share of the premium for such health coverage on a pre-tax basis.  There is no requirement that the insurance carriers (or stop-loss providers for self-insured plans) permit employees to enroll mid-year without experiencing a permitted election change event.

Employers must therefore first ensure that the insurance carrier (or stop-loss provider for self-insured plans) will accept employees’ mid-year enrollment without experiencing a permitted election change event for this new election opportunity to be made available.

  • Key Issue #7: Limiting Election Reductions to Amounts Already Reimbursed

Previous IRS Guidance

Previous IRS guidance provided that employers could amend their Section 125 cafeteria plan to allow employees to make prospective mid-year FSA election changes during calendar year 2020 without experiencing a permitted election change event.

The prior guidance confirmed that employers could choose to limit the mid-year FSA election revocation or decrease to amounts no less than amounts already reimbursed to the employee by the FSA in the plan year.  This was an important limitation option for employers to avoid potential experience losses from overspent accounts.

For more details:

The CAA FSA relief did not directly address this issue in the bill.

New IRS Guidance

The new IRS guidance confirms that employers limit a mid-year FSA election revocation or decrease to amounts no less than amounts already reimbursed to the employee by the FSA in the plan year.  This is an important limitation option for employers to avoid potential experience losses from overspent accounts. (Page 23)

Practical Result

Employers offering the option for employees to change their FSA election mid-year without a permitted election change event can ensure that employees will not reduce their FSA elections below amounts already reimbursed.  This will allow employers to offer this key relief feature without the concern that employees could abuse the provision by reducing their elections below amounts already reimbursed.

  • Key Issue #8: Cafeteria Plan Retroactive Amendment Deadline

Previous IRS Guidance

Proposed IRS regulations have provided that Section 125 cafeteria plans must be adopted and amended prospectively to be effective.

Nonetheless, nearly every new form of cafeteria plan guidance in recent years has included an exception to this general rule that has permitted employers to retroactively amend the plan for new changes in law.

The CAA similarly included a provision permitting retroactive amendments for the new relief as along as then amendment is adopted no later than the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective, and the plan is operated consistent with the terms of the amendment during the full retroactive period.

New IRS Guidance

The new IRS guidance states  employers adopting any of the optional provisions addressed above will need to amend their Section 125 cafeteria plan to reflect the changes.  Such amendments can be made retroactively, provided:

  • The amendment is adopted not later than the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective; and
  • The plan is operated consistent with the terms of such amendment for the full retroactive period—the period beginning on the effective date of the amendment and ending on the date the amendment is adopted.

Employers adopting the full carryover provision or the extended 12-month grace period must amend the cafeteria plan to reflect the change by the end of the first new calendar year into which amounts carry over or are available during the grace period. (Page 31)

Practical Result

Employers with a calendar year cafeteria plan and adopting the full carryover provision from the 2020 plan year into 2021 or the extended 12-month grace period provision into 2021 must amend the cafeteria plan by December 31, 2021 to reflect the change.

Employers with a non-calendar plan year will have a different deadline.  For example, an employer with a July 1 plan year adopting the full carryover provision or expanded 12-month grace period provision from the plan year beginning July 1, 2020 will have to amend their plan no later than December 31, 2022.

  • Key Issue #9: The Odd Dependent Care FSA Age Limit Increase to Age 14 in 2020

Previous IRS Guidance

Existing IRS guidance confirmed that an employee’s child ceases to be a qualifying individual under the dependent care FSA upon the child’s 13 birthday.

The CAA provides that employees whose children reached age 13 during the last dependent care FSA plan year for which the enrollment period was on or before January 31, 2020 (or in the subsequent plan year with respect to unused amounts) may continue to treat the child as eligible up to age 14 for such plan year.

New IRS Guidance

Although the origin and purpose of this perplexingly narrow form of relief remains  mostly a mystery, the IRS did at least shed light on how is to apply in practice. (Pages 16-19)

Where adopted, the provision applies only to employees who enrolled in the dependent care FSA for the last plan year with respect to which the end of the regular enrollment period for the plan year was January 31, 2020.  For calendar plan years, this is the 2020 plan year. 

Such employees must have one or more child who attained age 13 either during that plan year, or in the subsequent plan year for amounts that remained unused during that plan year.  The IRS interprets the amounts available in the subsequent year to be separate from the expanded carryover and grace period rules that otherwise apply, which means neither of those provisions need to be adopted to make the amounts available in the subsequent plan year under this special age 14 provision.

Practical Result

This is the least useful form of CAA relief because it is likely to benefit so few employees.  Nonetheless, we generally recommend employers consider adopting it to assist the small number of participants who had a child reach age 13 during the applicable years (i.e., last dependent care FSA plan year for which the open enrollment period was on or before January 31, 2020, or the subsequent plan year with respect to unused amounts).

For employers with a calendar plan year, this relief is generally effective only for the 2020 plan year, although it also applies to the 2021 plan year with respect to unused amounts from the 2020 plan year.

  • Key Issue #10: Employer-Imposed Restrictions on Relief Permitted

Previous IRS Guidance

Existing IRS guidance did not directly address whether employers could impose restrictions on the election change relief provisions, other than the general rule that employers have broad cafeteria plan design discretion under Section 125 to set election change rules within the applicable permitted election change event limitations (Treas. Reg. §1.125-4).

New IRS Guidance

Employers are permitted to limit mid-year election changes without experiencing a permitted election change event to certain dates.  For example, the employer may provide that employees can change elections without experiencing a permitted election change event only until March 31, 2021.

Employers are also permitted to limit the number of election changes during that plan year that are not the result of a permitted election change event.  For example, the employer could allow employees to make only one election change without experiencing a permitted election change event. (Page 23)

Practical Result

Employers that are concerned about a flood of election change requests if they adopt the election change relief provisions for plan years ending in 2021 can easily address that issue by restricting the timeframe or the number of requests for elections outside of a permitted election change event.


Brian Gilmore

About the author

Brian Gilmore

Brian Gilmore is the Lead Benefits Counsel at Newfront. He assists clients on a wide variety of employee benefits compliance issues. The primary areas of his practice include ERISA, ACA, COBRA, HIPAA, Section 125 Cafeteria Plans, and 401(k) plans. Brian also presents regularly at trade events and in webinars on current hot topics in employee benefits law. Connect with Brian on LinkedIn.


The information provided is of a general nature and an educational resource. It is not intended to provide advice or address the situation of any particular individual or entity. Any recipient shall be responsible for the use to which it puts this document. Newfront shall have no liability for the information provided. While care has been taken to produce this document, Newfront does not warrant, represent or guarantee the completeness, accuracy, adequacy, or fitness with respect to the information contained in this document. The information provided does not reflect new circumstances, or additional regulatory and legal changes. The issues addressed may have legal, financial, and health implications, and we recommend you speak to your legal, financial, and health advisors before acting on any of the information provided.

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