Additional COVID-19 Pandemic-Related Relief for Plans: Clarifications on Deadline Extensions and Flexibility in FSA Administration

As we begin the second year of the COVID-19 pandemic, the Department of Labor (DOL) and the IRS issued important guidance related to employee benefit plans. The DOL provided guidance on the statutorily mandated expiration of certain deadline extensions implemented in March 2020, and the IRS clarified the provisions of Section 214 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, enacted as part of the Consolidated Appropriations Act, 2021 (the Act), which provides relief with respect to flexible spending arrangements (FSAs).

Extension of Deadline Relief

Deadline Extension Relief: Background

On May 4, 2020, as a result of the COVID-19 pandemic, the DOL and the IRS published a Joint Notice extending deadlines to elect COBRA, pay COBRA premiums, elect HIPAA special enrollment, and file benefit claims, appeals and external review requests. The Joint Notice extended the applicable deadlines until the end of the “Outbreak Period” related to the COVID-19 pandemic, which is the period beginning on March 1, 2020, and ending 60 days after the end of the “National Emergency” proclaimed by the president (or such other date announced by the DOL and IRS in a future notification). At the same time, the DOL issued Notice 2020-01, which tolled certain obligations of plan sponsors and administrators, such as the obligation to timely remit employee deferrals to a benefit plan. In contrast to the Joint Notice, Notice 2020-01 only extended the time periods to the extent needed due to COVID-19 pandemic-related circumstances. We described the Joint Notice and Notice 2020-01 in more detail in an earlier alert. 

Critically, however, as stated in the Joint Notice, ERISA Section 518 and Internal Revenue Code Section 7508A, which authorize deadline extensions, limit the DOL and IRS to providing one-year extensions. Although not much attention was paid to the one-year limit when the Joint Notice and Notice 2020-01 were issued, the Outbreak Period has now lasted a year and the issue must be addressed. As the DOL and IRS have not previously interpreted the application of the one-year limit on deadline extensions, it was unclear whether the Joint Notice and Notice 2020-01 relief would end entirely on Feb. 28, 2021 (one year from the commencement of the Joint Notice and Notice 2020-01 relief), without regard to when an affected individual’s event occurred, or whether the one-year limit would apply on an individualized, case-by case basis. 

Deadline Extension Relief: Notice 2021-01

The DOL, with the concurrence of the IRS, issued EBSA Disaster Relief Notice 2021-01, which interprets the one-year limit for tolling any eligible deadlines to apply on a case-by-case basis. As such, the tolling period will apply until the earlier of (a) one year from the date the individual was first eligible for relief, or (b) 60 days after the announced end of the National Emergency (the end of the Outbreak Period). As a practical matter, this means that every individual who was, or becomes, subject to a deadline that ordinarily would have expired on or after March 1, 2020, will have until the first anniversary of that deadline to take the required action, unless the Outbreak Period ends sooner. Since the first date upon which an individual could be eligible for relief was March 1, 2020 (the first day of the National Emergency), the earliest date upon which a disregarded period ends is Feb. 28, 2021. Notice 2021-01 includes examples that illustrate the duration of the relief period.

The relief in Notice 2021-01 also applies to the plan sponsor obligations that were tolled by Notice 2020-01, such as the obligation to timely remit employee deferrals to a benefit plan. Since, in contrast to the Joint Notice, Notice 2020-01 only extends the time periods to the extent needed due to COVID-19-related circumstances, the relief under Notice 2020-01 generally would not extend a full year because COVID-19-related circumstances would not necessitate it. However, Notice 2021-01 is significant in that it provides for the continued availability of the Notice 2020-01 relief until 60 days after the announced end of the National Emergency (the end of the Outbreak Period).

Deadline Extension Relief: Next Steps

Plan sponsors and administrators should identify those individuals whose individual relief period is ending in the near future (i.e., those individuals for whom an applicable period would have ended in March 2020) and advise them of the impending end of the relief. On an ongoing basis, plan sponsors and administrators should ensure that employees and plan participants are aware of the applicability of the one-year limit and should consider affirmatively alerting individuals of the impending end of the relief period. In addition, we recommend reviewing existing plan disclosures to determine whether they should be revised to clarify the time in which an affected individual is required to take action.

The DOL also encourages ERISA group health plans to alert affected individuals of other coverage options that may be available to them, including the opportunity to obtain coverage through the Health Insurance Marketplace in their state. Note that a special enrollment period is currently available to individuals in the 36 states that use the HealthCare.gov platform and ends on May 15, 2021. At least 13 states, plus the District of Columbia, that operate their own marketplace platforms are offering a similar enrollment opportunity.

Cafeteria Plan Relief

When the Act was enacted in December 2020, it included, in Section 214 of the Taxpayer Certainty and Disaster Tax Relief Act of 2020, provisions providing flexibility under healthcare flexible spending arrangements (healthcare FSAs) and dependent care flexible spending arrangements (dependent care FSAs), including expanded periods during which amounts contributed to FSAs can be used and midyear election changes. The Act raised several questions, and the IRS, in Notice 2021-15, recently provided guidance on how plans and plan sponsors may implement Section 214 of the Act. Notice 2021-15 generally provides additional guidance on:

• Carryovers for plan years ending in 2020 and 2021
• Grace period extensions for plan years ending in 2020 and 2021
• Extended periods to incur claims for employees who cease participation in healthcare FSAs
• A special period to incur claims for dependent care FSAs for dependents who “age out” during the COVID-19 pandemic
• Certain midyear election changes for FSAs as well as medical, dental and vision plan elections for plan years ending in 2021

Cafeteria Plan Relief: Background

Amounts contributed to healthcare FSAs and dependent care FSAs generally must be used for expenses incurred in the same plan year as contributed, subject to narrow exceptions. A cafeteria plan generally may permit unused amounts contributed to a healthcare FSA or a dependent care FSA to be used for expenses incurred during a grace period up to two months and 15 days into the following plan year. Alternatively, with respect to a healthcare FSA, the plan may permit the carryover of unused contributions to the following year (up to the carryover limit, generally $500, and $550 for plan years beginning in 2020). A healthcare FSA may not provide for both the grace period and a carryover, and a dependent care FSA ordinarily may not permit the carryover of unused amounts. These rules have been relaxed solely for the plan years ending in 2020 and 2021, as more fully described below.

Cafeteria Plan Relief: Extended Time Periods

Carryover

Dependent care FSAs (in addition to healthcare FSAs) may permit the carryover of unused amounts from the 2020 and 2021 plan years. Further, all unused amounts may be carried over to the following plan year, even those in excess of the usual carryover limit and even if those amounts already were carried over from a previous year. For example, if $500 that was contributed to an FSA in 2019 was carried over from 2019 to 2020, and an additional $1,000 was contributed in 2020, the entire $1,500 may be carried over to 2021 if it remained unused at the end of 2020.

Grace Periods

For plan years ending in 2020 and 2021, the grace period for healthcare and dependent care FSAs can now be extended from two months and 15 days after the end of the plan year to up to 12 months after the end of the plan year. Notably, a plan is permitted to choose a grace period shorter than 12 months.

Post-Participation Claims

A healthcare FSA may also provide that employees who ceased participation (including due to termination from employment) during calendar year 2020 or 2021 are permitted to continue to receive reimbursements from unused amounts contributed through the date the employee ceased to be a participant in the healthcare FSA, for qualifying expenses incurred through the end of the plan year in which participation ceased and any related grace period. If a plan sponsor extends the grace period, the former participant also may receive reimbursements for expenses incurred during the extended grace period.

Carryover or Grace Period?

A plan can adopt either, but not both, of the enhanced carryover and extended grace periods. While the carryover and grace period relief largely overlap, they do differ with respect to post-participation claims. Employees who cease participation in a healthcare FSA during a plan year may be permitted to receive reimbursements from unused amounts for claims incurred during an extended grace period, but not during a carryover period.

Cafeteria Plan Relief: Dependent Care FSA Age Change

Generally, amounts in a dependent care FSA may only be used for eligible expenses for a dependent under the age of 13. The Act allows plans to increase the age limit to age 14 for dependents who turn age 13 in 2020, or in certain cases in 2021. This relief is limited to the last plan year with respect to which the end of the regular enrollment period was on or before Jan. 31, 2020, and — to the extent that the employee was enrolled in a dependent care FSA that year and has an unused balance from that year — the subsequent plan year. Participants who carried over an unused balance from their 2020 dependent care FSA into 2021 can use the carried-over funds for dependents who turn age 13 in 2020 or in 2021 for eligible expenses incurred in 2021. However, in all cases, eligible expenses are expenses incurred before the dependent turns age 14; this special age limit relief rule does not permit reimbursement of expenses for a child who is age 14 years or older. With respect to 2021, this relief is only available for funds carried over from the 2020 plan year and not for funds contributed to the dependent care FSA in 2021. This means that the two amounts (those carried over from 2020 and those contributed in 2021) have to be tracked separately.

Cafeteria Plan Relief: Midyear Election Changes

Cafeteria plan elections are generally irrevocable and must be made before the first day of the plan year, except for midyear changes permitted under applicable Treasury Regulations to reflect specific occurrences, such as a change in status or special enrollment period. The Act and Notice 2021-15 allow for the following prospective midyear elections for plan years ending in 2021, without regard to whether any of the criteria set forth in Treas. Reg. § 1.125-4 is met.

For employer-sponsored health coverage, plan sponsors may permit employees to:

• Prospectively elect coverage if the employee previously declined coverage.
• Revoke existing coverage and elect different coverage sponsored by the same employer, such as a different option offered by the employer or a change from individual to family coverage.
• Revoke coverage without electing other coverage sponsored by the same employer, provided that the employee attests in writing that the employee is enrolled or immediately will enroll in other health coverage not sponsored by the employer. The employer may rely on the attestation unless the employer has actual knowledge to the contrary. Notice 2021-15 includes a sample of an acceptable written attestation.

These changes apply to both self-insured plans and fully insured plans.

For healthcare FSAs (including limited-purpose healthcare FSAs compatible with HSAs) and dependent care FSAs, plan sponsors may permit employees to revoke an election, make a new election, or increase or decrease the amount previously elected.

Salary reductions under any revised election only may be applied prospectively.

Cafeteria Plan Relief: Implications for HSA Eligibility

Employees who are covered by a general-purpose healthcare FSA are not eligible to participate in an HSA. Further, employees who are no longer contributing to a general-purpose FSA but are eligible to receive reimbursements for incurred expenses from amounts carried over or during a grace period are also not eligible to participate in an HSA. This creates complications for plans that want to take advantage of the extended grace periods and carryover provisions where some employees have switched healthcare plans to participate in an HSA. Notice 2021-15 includes additional rules with respect to the conversion of a general-purpose healthcare FSA to an HSA-compatible healthcare FSA. A plan sponsor may, however, amend the plan to permit employees, on an employee-by-employee basis, to revoke an election to continue to participate in the healthcare FSA during the extended period for incurring claims for plan years 2020 and 2021 in order to maintain HSA eligibility. The revocation of the election should result in termination of participation in the FSA and provide either that no reimbursements will be available following the revocation, regardless of when incurred, or that reimbursements will only be available for expenses incurred during the pre-revocation period.

Cafeteria Plan Relief: Implications for COBRA

Under certain circumstances, participants who lose coverage under a group health plan, including a healthcare FSA, are eligible for COBRA. Notice 2021-15 clarifies that if a plan participant terminates employment and would be eligible for COBRA but is still eligible to be reimbursed for expenses from a healthcare FSA on account of the relief provided in the Act, the individual remains eligible for COBRA notwithstanding the fact that unused amounts may be used to pay for expenses incurred during the remainder of the plan year.

Cafeteria Plan Relief: Changes Are Permitted, Not Required

The changes described in the Act and Notice 2021-15 may, but are not required to, be adopted. Further, plan sponsors may adopt the changes partially and may limit the scope of the changes. For example, employers may provide that the election changes be made during a limited window, set a dollar limit on the amount of any carryover, specify a window during which any carried-over funds must be used, or implement changes for a dependent care FSA but not a healthcare FSA (or vice versa). Of course, plan sponsors may elect not to permit any carryover or grace period or not to permit any of the enhanced election changes. Plan sponsors thus have a significant amount of flexibility to implement the changes in a manner that allows them to efficiently administer such changes as well as implement a program that is appropriate for their employee population. Employers should, however, make sure the changes do not result in failure to comply with any nondiscrimination rules under their plans.

In order to implement the changes, plan sponsors must amend their cafeteria plans. Amendments may be effective retroactively, provided that the amendment is adopted not later than Dec. 31 of the year following the plan year in which the amendment is effective, and provided that the plan is operated consistent with the amendment from the effective date of the amendment. For example, if a plan is amended to permit a carryover from the 2020 plan year to the 2021 plan year, the amendment must be adopted no later than Dec. 31, 2021, if the 2020 plan year ends on Dec. 31, 2020, and no later than Dec. 31, 2022, if the 2020 plan year ends in 2021.

Conclusion

The guidance in Notice 2021-01 provides significant relief for plan participants, who may continue to benefit from the tolling of applicable deadlines, albeit with a one-year limit. On the other hand, it imposes additional administrative burdens on plan sponsors and administrators in what is already a challenging time. Plan administrators should adhere to the guiding principle set out by the DOL to “act reasonably, prudently, and in the interest of the affected plan participants.” 

Notice 2021-15 reduces the uncertainty that existed with respect to the permitted changes provided by Section 214 of the Act and presents plan sponsors with flexibility to implement the changes in a manner that is appropriate for their organizations. We recommend that plan sponsors continue to work with their administrators on implementing any such changes and make sure to communicate any changes to employees. 

If you have any additional questions, please contact a member of the Executive Compensation and Employee Benefits department.