Budget Bill Special Rules for FSAs

The Consolidated Appropriations Act, 2021 (the Budget Bill) contained many provisions which impact health plans. This alert focuses on the special rules for cafeteria plans that provide for health flexible spending arrangements (Health FSAs) and dependent care flexible spending arrangements (DCFSAs) for plan years ending in 2020 and 2021.1 In general, the special rules allow, but do not require, plans to provide (i) more generous carryovers and grace periods, (ii) mid-year election changes, (iii) post-participation reimbursements from Health FSAs, and (iv) coverage for children up to age 14 under DCFSAs.

Action Now: Plan sponsors may want to review the provisions and decide whether they want to immediately implement and operate their plans in accordance with these new rules or wait for the IRS to issue interpretive guidance.


FSAs are employer-sponsored benefits under Internal Revenue Code (Code) section 125 which allow employees to pay for health or dependent care expenses with pre-tax dollars. Generally, FSA elections must be irrevocable and made prior to the first day of the plan year (except for certain qualifying events). Under current law, DCFSA arrangements may only reimburse for expenses until the child turns 13.

If money in a Health FSA is left at the end of the year, the employer can offer one of two options (not both):

  • A grace period of 2½ months to spend the left-over money.
  • The ability to carry over an amount (currently up to $550) to spend in the next plan year.

If money in a DCFSA is left at the end of the year, the employer can offer the 2½ month grace period but no carry over.

Unused amounts after the grace period or amounts in excess of the carryover amount are forfeited. If a participant terminates employment with money in either account, that amount is forfeited.

On May 12, 2020, the IRS issued two notices that allow employers to ease certain restrictions and increased the FSA carryover amount. Notice 2020-29 permitted mid-year changes in elections during 2020 and extended the end date of the permitted grace period under a Health FSA or DCFSA for using unused amounts from the 2019 plan year. Notice 2020-33 increased from $500 to $550 the permitted carryover of unused amounts remaining as of the end of a plan year in a Health FSA.

  • Temporary Changes under Budget Bill

The budget bill makes the following changes to the general cafeteria plan rules described above. Employer-sponsors may choose to do all or some of these changes. However, it is unclear whether sponsors may offer both a carryover and a grace period for the same plan.

    • Carryover from 2020 to 2021 and from 2021 to 2022: For plan years ending in 2020, Health FSAs and DCFSAs2 can permit participants to carry over any unused benefits or contributions remaining in any such flexible spending arrangement from such plan year to the plan year ending in 2021. FSAs can also permit participants to carry over any unused benefits or contributions remaining from the plan year ending in 2021 to the plan year ending in 2022.
    • Extension of Grace Period: The grace period for a plan year ending in 2020 or 2021 can be extended to 12 months after the end of such plan year, with respect to unused benefits or contributions remaining in the Health FSA or DCFSA.
    • Post Participation Reimbursements from Health FSAs: A Health FSA can allow an individual who ceases participation in the plan (generally from terminating employment or having reduced hours) during the 2020 or 2021 calendar year to continue to receive reimbursements from his/her unused benefits or contributions through the end of that plan year plus any grace period.
    • Increase in Child Age Limit for Dependent Care: For the last plan year with an enrollment period ending on or before January 31, 2020 (the 2020 plan year for calendar plan years), the maximum age is increased so childcare expenses can be reimbursed under a DCFSA until the child turns 14, provided the employee has one or more dependents that attain the age of 13 during such plan year. This also applies during the subsequent plan year (the 2021 plan year for calendar plan years) to the extent there is an unused balance in the employee’s account as of the last day of such prior plan year.
    • Mid-year Change in Election Amount: For plan years ending in 2021, a Health FSA and/or DCFSA can allow employees to modify their future contribution amounts (but not in excess of any applicable dollar limitation) without regard to any change in status at any time during the plan year ending in 2021.


These changes can be viewed as a logical extension of the previous COVID-19 changes permitted for FSAs, described in our prior Alert dated July 2, 2020. However, there are questions regarding the temporary rules that may be answered in official guidance from the IRS. Accordingly, plan sponsors may want to wait for the interpretive guidance before making any plan changes.

Cheiron consultants can assist with the implementation of these changes and your FSA plan design.

Cheiron is an actuarial consulting firm that provides actuarial and consulting advice. However, we are neither attorneys nor accountants. Accordingly, we do not provide legal services or tax advice.

1 See section 214 of Division EE of the budget bill.

2 Note under current regulations, a dependent care FSA cannot employ the carryover feature. However, under this temporary rule a DCFSA can adopt the carryover for the 2020 and 2021 plan years in the same manner as it is used under Health FSAs.