Consolidated Appropriation Act Contains Many Benefit Changes
The Consolidated Appropriations Act of 2020 (containing the stimulus bill) was signed into law after a week-long delay on December 27, 2020. The new Act contains many benefit changes—many positive for employees—and nearly all of which are optional on the part of the employer. We know this is coming long after open enrollment has ended for calendar year plans, but employers will want to pay close attention and decide which (if any) they would like to adopt.
Flexible Spending Accounts in 2021 and 2022
Much like the changes first introduced in the CARES Act earlier in 2020, this Act loosens certain rules applicable to health and dependent care flexible spending accounts (FSAs). Health and dependent care FSAs can optionally allow all unused amounts from a plan year ending in 2020 to be carried over to 2021, and unused amounts from a plan year ending in 2021 to be carried over to 2022. This is regardless of the now-indexed carryover cap limit (previously set at up to $550 for 2021). Grace periods for plan years ending in 2021 or 2022 may be optionally extended to 12 months after the end of the plan year as well.
For plan years ending in 2021, plans may optionally allow employees to make a prospective election change to modify their FSA contributions (and thus annual election) in both types of accounts without a change in status. However, note that much like the previous CARES Act changes for 2020, the employer can restrict a reduction in health care FSA annual elections to no less than the amounts already reimbursed under the plan. Health FSAs may optionally allow employees who ceased participation during the 2020 or 2021 calendar year to continue to receive reimbursements from unused benefits or contributions through the end of plan year in which participation ceased (including any grace period).
Dependent care FSAs may optionally extend the maximum age from 12 to 13 for eligible dependents who aged out of eligibility during the last plan year with a regular enrollment period ending on or before Jan. 31, 2020, and may allow employees with unused balances for that plan year to apply this rule to claims for reimbursement of the unused balance in the following plan year.
Plans adopting any of these voluntary changes must be amended by the end of the first calendar year beginning after the end of the plan year in which a change took effect, and must be operated in accordance with the amendment’s terms beginning on its effective date. For example, if the above changes are applied to the 2020 plan year (which happens to also be the calendar year), the plan must amend its documents by December 31, 2021. However, please note that core cafeteria plan principles remain in place: cashouts of unused contributions and retroactive election changes are not permitted. Note too that allowing carryovers, grace periods, or an extended coverage period under a health FSA may likely impact the employer and/or employee’s ability to make HSA contributions.
Retirement Plan Disaster-Relief Changes for 2021
The Consolidated Appropriations Act (CAA) makes disaster-relief changes to qualified retirement plans for 2021 in a somewhat similar manner to what the CARES Act did earlier for 2020. Retirement plans may optionally provide “qualified disaster distributions” of up to $100,000 that will not be subject to the 10% additional tax on early distributions to those under the age of 59 ½. Such distributions may be repaid within 3 years to an eligible retirement plan if rollover contributions are allowed. Also, certain hardship distributions taken to purchase or construct a principal residence in a disaster area may be repaid. Finally, the limit on loans that are not treated as plan distributions is also temporarily increased for qualified individuals living in a qualified disaster area. The relief applies to disasters declared during the period beginning on January 1, 2020, and ending 60 days after the Act’s enactment, if the “incident period” for the disaster began on or after December 28, 2019, and on or before the date of enactment. This relief is similar to that provided in the CARES Act and nearly identical to relief adopted for disasters in 2018 and 2019. It does not apply to areas that are disaster areas solely due to the COVID-19 pandemic—relief for that disaster was provided in the CARES Act. Unlike the 2018 and 2019 version of this relief, the 2020 version also refers to the Thrift Savings Plan for federal employees and to money purchase pension plans.
Student Loan Relief
The CAA amends the definition of educational assistance under Code §127 to extend a temporary provision that allows employers’ qualified educational assistance programs to repay qualified education loans (generally, loans for higher education expenses) that were incurred by employees for their own education. The current provision added by the CARES Act was set to expire January 1, 2021. As extended, the provision applies to amounts paid under a qualified educational assistance program before January 1, 2026. Note that he extension does not alter the annual maximum nontaxable benefit of $5,250.
Other Provisions Impacting HR and Employee Benefits
The CAA also contains provisions regarding surprise medical billings (this is very positive for employers and especially employees who inadvertently use out-of-network providers in both emergency and nonemergency situations); an expansion of mental health parity language where a nonquantitative measure is used (such as restrictions on facility types); and a temporary expansion of the meal deduction limits for expenses incurred January 1, 2021 through December 31, 2022.
We’re sure there will be proposed and hopefully final regulations on these changes issued sometime in 2021, so stay tuned.