By: HUB’s EB Compliance Team

On February 18, 2021, the IRS released Notice 2021-15 to clarify flexible spending account (“FSA”) relief contained in the year-end COVID bill (“the Consolidated Appropriations Act”; “CAA”). The Notice also extends additional cafeteria plan election relief and offers new detail about adopting amendments to reflect these and other changes.

FSA Flexibility

As we reported in our prior article, the most visible change is significantly broader flexibility for both health care and dependent care FSAs. Specifically:

  • Any unused funds from a plan year ending in 2020 or 2021 may be carried over and used at any time in the next plan year. These new carryover rules resemble established carryover rules generally governing health FSAs, except that they can be applied to dependent care FSAs and the dollar limit does not apply.
  • Similarly, new grace period rules resemble established grace period rules, except that now FSAs using grace periods may extend them up to 12 months. (Normally, grace periods can have a maximum 2 ½-month period).
  • If an employee terminates participation during calendar year 2020 or 2021, FSAs may also reimburse for otherwise eligible expenses incurred through the end of that year (plus any grace period). For health FSAs, the plan may limit reimbursement to the amount of contributions made up until that point (less any previously incurred expenses). This is different from a well-established tax rule that ends the period in which expenses may be incurred on the employee’s termination date.
  • For dependent care FSAs, if a dependent became too old to have their care expenses reimbursed (age 13), any unused funds remain available for the balance of the plan year in which they aged out. If any funds remain unused at that time, those dollars can be used until the child turns 14. However, this only applies for dependent care FSAs that had their most recent regular open enrollment period before January 31, 2020.  

The Notice confirms that these provisions are optional, not required. It also reaffirms that these enhanced carryovers and grace periods will not cause a health FSA lose “excepted benefit” status. This means a health FSA will not have to comply with all the Affordable Care Act mandates as a result of adopting one of these provisions.

Even More HSA Flexibility. The Notice provides particularly important additional color about health FSAs and their interaction with health savings accounts (“HSAs”). We previously advised, based on the CAA’s statutory language, that carryovers were better for employers that offer HSAs because the carryover rules let an employer convert the carryover to an HSA-compatible carryover on an employee-by-employee basis whereas the grace period does not allow for this (as described here). However, the Notice provides substantial new flexibility in this regard. Specifically:

  • Employers may allow employees to drop coverage under the health FSA to preserve HSA flexibility. For this to work, the health FSA must limit reimbursements to expenses incurred before the employee dropped coverage.
  • Employers may also allow employees to choose to convert their health FSAs to HSA-compatible health FSAs for the carryover or the grace period. This can also be made automatic so that employees that enroll in high deductible health plans automatically have their health FSAs converted to HSA-compatible versions. (Note:  Because contribution limits to HSAs are generally determined monthly, changing to an HSA-compatible FSA mid-year may limit the employee’s ability to make the full amount of HSA contributions for the year.)

Extra Grace. A footnote in the Notice adds that, since the grace period is now extended to 12 months, forfeitures are not required for plans with the grace period. In other words, unused funds at the end of the 2020 plan year can be rolled over into the 2021 plan year and, if they remain unused by the end of 2021, into the 2022 plan year as well. 

Pick and Choose. Employers may adopt some, all, or none of these options. They may also limit the groups of employees to which these options are available (subject to applicable nondiscrimination requirements).

Limited Time Offer. Consistent with the CAA statute, this flexibility is only available through the end of the 2022 plan year. This means the regular carryover and grace period rules restart for plan years ending in or after 2022 (i.e. for carryovers/grace periods going into the 2023 plan year).

Re-election Flexibility

In addition, the Notice effectively extends, for the employers 2021 cafeteria plan year, the election flexibility allowed in 2020. Specifically, employees may:

  • Make a new election to enroll in the employer’s medical, dental, or vision plan, if the employee initially declined to enroll;
  • Change to a different medical, dental, or vision coverage option or tier sponsored by the same employer (such as moving to a different plan or changing from single to family coverage);
  • Unenroll from the employer’s medical plan, if the employee attests in writing that he or she is enrolled, or immediately will enroll, in other medical coverage not sponsored by the employer (including coverage through a spouse or on an ACA exchange – the IRS notice has a sample attestation);
  • Enroll in, drop, or change the elected amount for a health FSA; and
  • Enroll in, drop, or change the elected amount for a dependent care FSA.

As in 2020, these are optional, not required. Additionally, any election changes will only apply prospectively. Finally, employers may put limits on making these changes, such as requiring that participants make any change by a specified deadline, or only allowing employees to elect more favorable employer coverage, rather than changing to any employer coverage. (Thereby disallowing employees' shifting to less expensive coverage.) Additionally, for the health and dependent care FSAs, employers may require that an election cannot be reduced below amounts already reimbursed. Plan sponsors should consider invoking this rule to prevent employees from overdrawing their spending account and reaping a windfall at plan expense.

Other Items

The Notice also addresses the following common questions regarding this flexibility:

  • Regardless of any election changes, or additional flexibility - unused amounts in a health or dependent care FSA may NOT be refunded to the employee. (So, no cash-outs, even on a taxable basis.) 
  • Offers of COBRA are still required on health FSAs, even if employees are allowed to continue to use health FSA amounts contributed.
  • Any amounts that are part of the extended carryover or grace period may not be included in the COBRA premium.
  • For dependent care FSAs, employers should still use the amount contributed for that year, not including any extra amounts as a result of the grace period or carryover, for purposes of W-2 reporting.
  • Employers availing themselves of any of this flexibility must not amend or operate their plans in a way that would be discriminatory under applicable cafeteria plan or other rules. (For example, by limiting election relief eligibility to executives.)


Employers must amend their plans to provide these new options, if they choose to offer them. Although many employers will decide against making plan changes, those that do have plenty of time to complete the task. The IRS gives plan sponsors until the end of the first calendar year after the plan year in which the change is effective to amend retroactively. (Of course, the plan must have operated in the manner described in the amending language during the period contemplated in the amendment.)

Finally, the Notice also addresses amendments to health FSAs and health reimbursement arrangements allowing them to reimburse for the cost of over-the-counter medicines and menstrual products. The Notice allows amending the plan to add this extra feature retroactively to January 1, 2020.

Both options are an exception to the general rule that a cafeteria plan may not be amended retroactively.


Employers now have a veritable smorgasbord of options. Employers should first decide which flexibility (if any) they intend to provide and confirm that the service providers administering these plans can accommodate the plan sponsor’s targeted design options. Then they should communicate that new flexibility to their employees and amend their plans to reflect it. Although the IRS offers plan sponsors a generous amendment period deadline, it is still advisable for employers to promptly amend their plans while this relief is still top of mind.

For the latest information on the COVID-19 crisis and its effect on employers, please keep visiting HUB’s Coronavirus Resource Center. If you have any questions, please contact your HUB Advisor. You can also view more compliance articles in our Compliance Directory.


The information herein is intended to be educational only and is based on information that is generally available. HUB International makes no representation or warranty as to its accuracy and is not obligated to update the information should it change in the future. The information is not intended to be legal or tax advice. Consult your attorney and/or professional advisor as to your organization’s specific circumstances and legal, tax or other requirements.