The Consolidated Appropriations Act was signed into law on December 27, 2020, and provides various types of financial relief during the pandemic. Below is an outline of financial relief for employees and individuals covered under medical and other benefit plans.
Flexible Spending Accounts (FSAs)
Carryover of DCAP and FSA Balances. Dependent care (DCAP) and flexible spending account balances that were unused in 2020 may be carried over to 2021. Similarly, unused 2021 balances may be carried over to 2022.
Election Changes. Employers may allow participants to change contributions to their FSA/DCAP accounts prospectively for any reason in 2021 and without having a change in status.
Continued Coverage. FSAs may 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 the plan year in which participation ceased (including any grace period). Grace periods for plan years ending in 2020 or 2021 may be extended to 12 months after the end of the plan year.
Dependent’s Age. DCAPs may extend the maximum age from 12 to 13 for eligible dependents who aged out of eligibility during the last plan year (having a regular enrollment period ending on or before January 31, 2020) and may allow employees with unused balances for that plan year to apply them to claims for reimbursement in the following plan year.
Amendments. Amendments for these optional provisions are due by December 31 of the calendar year, beginning after the end of the plan year in which the change takes effect. Plans adopting any of these voluntary changes must be operated in accordance with the amendment’s terms beginning on its effective date.
Caveat. Cashouts of unused contributions and retroactive election changes continue to be disallowed. Allowing carryovers, grace periods, or an extended coverage period under a health FSA may impact health savings account (HSA) eligibility.
No Surprise Billing. In plan years beginning on or after January 1, 2022, medical plans and insurers are limited in the cost-sharing and other restrictions they can impose on medical bills for services to patients provided by non-participating (“out-of-network”) providers or facilities. Different rules apply for emergency and non-emergency services, but in each case, insurers must make initial payments or issue denial notices to providers within specified deadlines.
Deductible Medical Expenses. The ACA increased the threshold for an individual taxpayer’s deductible itemized medical expenses from 7.5% to 10% of adjusted gross income. Subsequent legislation restored the 7.5% threshold for 2017 through 2020. The Act makes the 7.5% threshold permanent.
No Partial Termination. If there is a 20% or more drop in the number of active retirement plan participants between March 13, 2020, through March 31, 2021, there will be no need to treat it as a partial plan termination. Instead of vesting affected participants 100%, normal vesting can continue. This change helps employers that furloughed or laid off employees during the pandemic continue normal plan vesting.
Plan Loans: Increase in Limit and Extension of Period to Repay. For a qualified individual, the limit on loans from defined contribution retirement plans is increased to the lesser of $100,000, or 100% of the participant’s vested account balance, instead of the $50,000 and 50% limits that normally apply under the law. This applies to loans made from December 27, 2020, to June 25, 2021.
The new law also provides some relief for certain new and existing plan loans by delaying repayments by one year (or if later, until June 25, 2021), provided the payment is otherwise due in a set “incident period,” defined by law and related to the pandemic. This additional year is disregarded for purposes of applying the maximum 5-year term that applies to a general-purpose loan or the maximum term that applies to a home loan. When loan repayments resume, they are re-amortized.
Tax-Favored Disaster Retirement Plan Withdrawals. A participant may take a tax-favored withdrawal from a 401(k), 403(b), or other defined contribution plan or IRA of up to $100,000, free from the 10% penalty that normally applies to early withdrawals. A participant who takes a tax-favored disaster withdrawal may elect to include the distribution in taxable income ratably over a three-year period and/or re-contribute the distribution to an eligible retirement plan within that three-year period.
Student Loan Repayments. The new law extends a temporary provision (under Code section 127) that allows employers to repay qualified education loans (up to certain limits) incurred by employees for their own education. The current provision (added by the CARES Act) was set to expire on January 1, 2021. The relief is now extended to January 1, 2026.
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