IRS Details Additional Temporary Guidance for Cafeteria Plans

The IRS has issued Notice 2021-15, providing additional guidance and flexibility to employee benefit plans offering health FSA and dependent care arrangements. Because of COVID-19, employees participating in these programs are more likely to have unused amounts in these accounts as a result of changes in anticipated expenses during the pandemic. To qualify as a cafeteria plan under IRC Section 125, funds remaining at the end of the plan year generally cannot be carried over to future plan years, and restrictions apply when modifying elections after the start of the plan year.  

While initial temporary relief was made available for 2020, the Consolidated Appropriations Act of 2021, enacted in December 2020, provides the following additional flexibility for 2021 and 2022 plan years. 

• Permits post-termination reimbursements through the end of the plan year that participation ceased for health and dependent care FSAs. 
• Creates special rule for dependent care programs, allowing the plan to substitute “under age 14” for “under age 13” as the maximum age for qualifying dependents. 
• Provides carryover of unused funds into the subsequent plan year from the 2020 and 2021 plan years. 
• Allows health and dependent care FSAs to offer a grace period extension of 12 months after the end of the plan year. 
• Permits mid-year election changes by plan participants of health and dependent care FSAs for plan years ending in 2021 without a change in status. 

Notice 2021-15 provides illustrative examples of these provisions, details on interaction with COBRA continuation coverage, and timing of plan amendments. The notice also provides additional relief that allows employers to retroactively amend their 

• cafeteria plans to permit mid-year election changes for employer-sponsored health coverage, and 
• health reimbursement arrangements to permit reimbursement of over-the-counter drugs without a prescription and menstrual care products.