IRS Issues Notice on Health and Dependent Care Assistance Programs

On February 18th, 2021, the Internal Revenue Service (IRS) released a new notice covering health and dependent care assistance programs. Under this notice, employee benefit plans offering health flexible spending arrangements (FSAs) or dependent care assistance programs have greater flexibilities. These changes occurred under the COVID-related Taxpayer Certainty and Disaster Tax Relief Act of 2020. Now, employers have additional discretion in 2021/2022 to adjust programs to help employees meet unanticipated consequences of the coronavirus pandemic. Previously, the IRS was part of a joint final rule involving the coverage of COVID-19 vaccines within employer health plans.

Overview of Notice 2021-15

As mentioned earlier, the IRS released the new notice in mid-February. Specifically, Notice 2021-15 responds to unanticipated changes in the availability of certain medical care and dependent care. During COVID-19, participating employees are likely to have unused amounts within 2020 and 2021 health or dependent care assistance programs. Generally, under these plans, employees can set aside pre-tax wages to pay for medical care and dependent care expenses. Amounts spent by the employee are then reimbursed from their designated health FSAs or dependent care assistance programs. Specifically, Notice 2021-15 provides flexibility for employers in the following areas related to these assistance programs:

• The carryover of unused amounts from the 2020 and 2021 plan years;
• Extending the permissible period for incurring claims for plan years ending in 2020 and 2021;
• Adopting a special rule regarding post-termination reimbursements from health FSAs;
• Creating a special claims period and carryover rule for dependent care assistance programs when a dependent "ages out" during COVID-19; and
• Allows certain mid-year election changes for health FSAs and care assistance programs for plan years ending in 2021.

Employer Takeaways

In conclusion, millions of employees have access to assistance programs for health and dependent care under employer-provided "cafeteria plans." Prior guidance granted flexibility to employers with “cafeteria plans” through the end of calendar year 2020. During that time, employees could apply unused health FSA and dependent care assistance amounts to pay for or reimbursable expenses. As mentioned earlier, the Taxpayer Certainty and Disaster Tax Relief Act of 2020 provides similar flexibility for 2021/2022. The decision, however, to adjust these programs is at the discretion of the employer. If you offer these assistance programs to employees, you must make sure the flexibilities apply to all eligible workers. Failure to do so could result in IRS fines and penalties.