IRS Provides Additional Discretion for FSA Carryovers

The Internal Revenue Service (IRS) has provided additional discretion for Flexible Spending Account (FSA) carryovers and dependent care assistance programs. IRS Notice 2021-15 clarifies the application of the COVID-19-related Taxpayer Certainty and Disaster Tax Relief Act, enacted in December 2020, which gives employers with cafeteria plans the option to amend their plans to enable their employees to use Flexible Spending Accounts (FSAs) funds during the pandemic without risking forfeiture of the amounts they have set aside. Prior guidance had provided flexibility to employers through the end of 2020. Notice 2021-15 clarifies employers’ flexibility to allow employees to:

  • Carry over unlimited unused amounts from the 2020 and 2021 plan years
  • Extend the grace period for incurring claims for plan years ending in 2020 and 2021
  • Spend down health FSA balances through the end of a plan year even after an employee stops participating in the program
  • Claim dependent care FSA relief for dependents who “age out” (normally age 13) during the COVID-19 public health emergency, and carry over unused balances to the following plan year, until the child reaches age 14
  • Allow certain mid-year election changes for plan year ending in 2021

The decision to adjust employee benefit programs is at the discretion of the employer, and carryover relief is allowed whether or not the current plan allows carryover or a grace period. However, the cafeteria plan must be amended to reflect the relief, the amendment must be 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 amendment must be communicated to all eligible employees.

For details, refer to Notice 2021-15 or the IRS news release.