Updates on FSA Carryover Rule Changes Post COVID Relief Expiration

Update: the information below applies only for 2021-2022 FSA carryovers; from 2023-2024 and beyond the maximum allowable FSA contribution amount has been reduced back down to 20% of what was once allowed by the IRS.

Notable update for readers with flexible spending accounts (FSAs) – Congress passed and signed into law the Taxpayer Certainty and Disaster Tax Relief Act of 2020 as a COVID relief measure, which may provide temporary flexibility on FSA carryover funds and how you use them in 2021 and 2022.

IRS recently provided clarity regarding new FSA rule changes for 2021-2022:

Provides flexibility for carrying over any unused amounts from 2020-2021 plan years;
Extends the permissible claims-filing periods for 2020-2021 plan years;
Provides flexibility to create special rules governing post-termination reimbursements from health FSAs; allows for special claims periods and carryover rules to assist dependent care assistance programs when their dependent “ages out” during COVID-19 public health emergencies; and gives sufficient leeway when adopting special post-termination reimbursement rules from FSAs;
Plan years ending in 2021 will permit certain mid-year election changes for health FSAs and dependent care assistance programs, allowing mid-year adjustments.
Notable among these changes is that the IRS now permits unutilized funds contributed during one year (2020-2021, or 2021-2022) to COVID participants to carry over into future years, in order to assist with health care expenses during that period. FSAs previously had a “use it or lose it” rule, under which any unutilized contributions were forfeited at the end of each year (though employers could give employees up to 2.5 months grace period to use funds). Few years ago, employers introduced a new FSA carryover rule allowing employers to change their FSA plans so that up to $550 (inflation adjusted 2021 limit) of rollover could be carried over from year-to-year. Due to this temporary rule change, this limit has now been removed and grace period extended through December 31.