The Office of Personnel Management (OPM) announced last week that starting July 1 there is a 60-day limited period in which participants in the Federal Flexible Spending Account Program (FSAFEDS) can make mid-year changes to their FSA accounts.
This column discusses the reasons why OPM is offering this special mid-year election period and what FSAFEDS participants need to do in order to make changes to their FSA accounts. These FSA accounts include the Health Care FSA (HCFSA), Dependent Care FSA (DCFSA) and the Limited Expense Health Care FSA (LEX HCFSA).
- SEE ALSO: IRS Provides Tax Relief for Individuals Enrolled in Flexible Spending Accounts, Including FSAFEDS
The IRS in Notice 2020-29 provides flexibility with regard to mid-year Internal Revenue Code (IRC) Section 125 elections in order to assist employers offering IRC Section 125 “cafeteria plans” related to employer-sponsored health coverage, health flexible spending arrangements, and dependent care assistance programs in response to the COVID-19 pandemic. IRS Notice 2020-29 also provides increased flexibility regarding grace periods to apply unused amounts in HCFSAs, LEX HCFSAs and DCFSAs. With the many work-related and health-related changes resulting from the COVID-19 pandemic, the IRS felt it necessary to allow mid-year changes in FSA accounts which normally – unless there is a qualifying life event (QLE) – would not be permitted.
As the Plan Administrator of the FSAFEDS program (“FedFlex”), OPM following IRS Notice 2020-29 is therefore permitting FSAFEDS a 60-day limited period starting July 1st during which FSAFEDS participants can make certain changes to their existing elections. It should be emphasized that FSAFEDS participants do not need to be directly affected by COVID-19 and do not need to experience a QLE in order to make these mid-year FSAFEDS changes.
FSAFEDS Permitted Changes
During the 60-day limited period, all participants who have enrolled in the HCFSA, LEX HCFSA and/or DCFSA for plan year 2020 will be allowed to make a one-time change – an increase or a decrease – in the amount of their annual election in any FSA account in which they are enrolled. These participants initially made their 2020 FSA elections (how much to be withheld from their paychecks every two weeks) during the last FSAFEDS “open season” held November 11 through December 16, 2019, with the first paycheck withholding in early January 2020.
In accordance with IRS guidance, the mid-year 2020 election amount change is effective prospectively. This means that any election amount change will take effect in the first pay period after approval by FSAFEDS. As such, FSAFEDS participants cannot receive a refund of allotments from pay they have already made to their FSA account(s) year-to-date. Also, FSAFEDS participants cannot decrease their election below the amount already allotted to the FSA account or the amount already reimbursed for eligible expenses, whichever is greater. The following examples illustrate:
Example 1. During the FSAFEDS “open season” in late fall, 2019 Lucy elected $1,375 to be allotted to her HCFSA for 2020, to be taken in an allotment an $52.88 per pay period ($1,375/26 or $52.88 for the 26 pay dates in 2020). Lucy wants to reduce her annual election in July 2020. At the time her newly-reduced election becomes effective, $740.38 – 14 pay dates times $52.88 per pay date – had been allotted to her HCFSA and $350 has been reimbursed to her for eligible health care expenses. Lucy can reduce her HCFSA election for the rest of 2020 as low as $740.38, the amount already allotted, as the amount reimbursed ($350) is not a greater amount.
Example 2. During the FSAFEDS “open season” in late fall 2019, Tom elected to allot the maximum $2,750 to his 2020 LEX HCFSA. In early January 2020, Tom used the entire $2,750 for dental expenses. Tom cannot reduce his election in July because he has already been reimbursed the entire $2,750 for 2020.
Example 3. During the FSAFEDS “open season” in late fall 2019, Cheryl elected $4,000 to be allotted to her DCFSA. Because she has not been using her DCFSA due to the fact that the child care center she has been using is closed, Cheryl wants to reduce her DCFSA election. At the time of her election in July 2020, $2,500 has been allotted to her DCFSA and $2,500 has been reimbursed to her. Cheryl can reduce her election as low as $2,500, the amount already allotted.
For FSAFEDS participants who make a change in their election, FSA allotments will be adjusted prospectively and prorated over the remaining pay periods in 2020. This means the new allotment amount each pay period will depend on the number of remaining pay periods at the time the change becomes effective. The following examples illustrate:
Example 1. During the FSAFEDS “open season” in late fall 2019, Victor elected to allot $1,690 to his 2020 HCFSA to be taken in equal allotments for the 26 pay dates in 2020. In July 2020, Victor decides to increase his annual election to $2,080 due to increased medical care costs for him and his family. The amount of his remaining allotments will be calculated as follows:
Current election amount: $1,690
Current allotment amount: $1,690/26 pay periods = $65/pay period
New election amount: $2,080
Amount already allotted year-to-date: 16 pay periods x $65/pay period = $1,040
Difference: $2,080 less $1,040 = $1,040
New allotment amount: $1,040/10 pay periods = $104/per period
Example 2. During the FSAFEDS “open season” in late fall 2019, Julie elected $2,750 to be allotted to her HCFSA for 2020. In mid-July 2020, Julie submits to change her election. At that time, she had allotted via payroll deduction so far in 2020 $1,375 and had been reimbursed $1,025. Julie elects to reduce her annual election to $2,000. There are 12 pay periods remaining in the year. The amount of Julie’s remaining allotments will be calculated as follows:
Current election amount: $2,750
Current allotment amount: $2,750/26 pay periods = $105.77/pay period
New election amount: $2,000
Amount already allotted year-to-date: 14 pay periods x $105.77/pay period = $1,481
Difference: $2,000 – $1,481 = $519
New allotment amount: $519/12 pay periods = $43.25/pay period
Extended Period both to Incur Eligible Expenses and to Claim Reimbursement of Unused 2019 DCFSA Amount until Dec. 31, 2020
The 2019 DCFSA grace period had an original deadline of March 15, 2020. The grace period has been extended to Dec. 31, 2020 in order to allow additional time to incur eligible DCFSA expenses. Claims for reimbursement of these expenses were due by April 30, 2020. Any funds not used during the grace period are normally forfeited. An extension of this period is being allowed this year on a one-time basis. Specifically, DCFSA participants for the year ending Dec. 31, 2019 will now be allowed to incur eligible expenses until Dec. 31, 2020. The extended claim period is automatic for qualified participants. No formal action need be done by DCFSA participants during the 2019 plan year.
HCFSA and LEX HCFSA Carryover Amount from 2020 into 2021 Increased to $550
IRS Notice 2020-33 authorizes an increase in the carryover amounts for HCFSA and LEX HCFSA from $500 to $550. HCFSA and LEX HCFSA participants may now carryover up to $550 of unused amounts in their HCFSA and LEX HCFSA remaining at the end of 2020 into 2021. To carryover any amount up to $550, they must re-enroll for the 2021 plan year during FSAFEDS “open season” in late fall 2020. This is true whether or not they will have additional money withheld from their paychecks during 2021 to be allotted to their HCFSA or LEX HCFSA.
How to Submit FSAFEDS Changes
To make changes during this special 60-day special enrollment period, FSAFEDS participants should visit www.fsafeds.com. If they have questions or seek additional information, they may call 1-877-FSAFEDS (1-877- 372-3337). Note that because the special 60-day enrollment period to make changes started July 1, 2020, the last day to make changes is August 29, 2020.