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IRS Clarifies Health FSA Carryovers, Claims Periods

Posted on Feb. 19, 2021

New IRS guidance clarifies recent relief provided to employers regarding carryovers of unused amounts of flexible spending accounts from the 2020 and 2021 plan years.

IRS Notice 2021-15, 2021-10 IRB 1, explains that an employer can amend its section 125 cafeteria plan to provide a carryover of the unused amounts remaining in a health FSA or a dependent care assistance program at the end of a plan year ending in 2020 or 2021 to the plan year that immediately follows.

The notice clarifies relief provided by the $2.3 trillion Consolidated Appropriations Act, 2021 (P.L. 116-260), enacted December 27, 2020.

Employers can also amend their section 125 cafeteria plans to allow employees to apply any unused amounts remaining in an FSA or dependent care assistance program at the end of a plan year ending in 2020 or 2021 to reimburse expenses incurred for the qualified benefit up to a year after the end of the plan year, the notice explains.

“For example, if an employer sponsored a calendar year section 125 cafeteria plan in 2020 with a health FSA, the employer may amend the plan to permit employees to apply the entire unused amount remaining in their health FSAs as of December 31, 2020, to reimburse employees for medical care expenses incurred through December 31, 2021,” according to the notice.

The notice states that an employer may limit the unused amount in the FSA of an employee who stopped being a plan participant to the salary reduction contribution amount the employee made from the start of the plan year to the date they stopped being a participant.

Employers can’t amend their plans to adopt both the new law’s carryover relief and its extended claims period for a particular plan year, and an amendment must specify which option is adopted for the applicable plan years.

The guidance also provides flexibility for a special claims period and carryover rule for dependent care assistance programs when a child ages out of eligibility during the pandemic, and it allows some midyear election changes for FSAs and dependent care assistance programs for plan years ending in 2021.

IRS Notice 2020-29, 2020-22 IRB 864, released in May 2020, temporarily extended the claims period for FSAs for unused 2019 amounts through the end of 2020.

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