Internal Revenue Service | Fraser Blog

Client Alert: PCORI Fees Due by July 31, 2022!

The Internal Revenue Service recently released Notice 2022-04 which sets forth the PCORI amount imposed on insured and self-funded health plans for policy and plan years that end on or after October 1, 2021 and before October 1, 2022.

Background

The Patient-Centered Outcomes Research Institute (PCORI) fee is used to partially fund the Patient-Centered Outcomes Research Institute which was implemented as part of the Patient Protection and Affordable Care Act.

The PCORI fees were originally set to expire for plan years ending before October 1, 2019. However, on December 20, 2019, the Further Consolidated Appropriations Act was enacted and extended the fee to plan years ending before October 1, 2029.

The fee is calculated by using the average number of lives covered under a plan and the applicable dollar amount for that plan year. Code section 4375 imposes the fee on issuers of specified health insurance policies. Code section 4376 imposed the fee on plan sponsors of applicable self-insured health plans. This Client Alert focuses on the latter.

Adjusted Applicable Dollar Amount

Notice 2022-04 sets the adjusted applicable dollar amount used to calculate the fee at $2.79. Specifically, this fee is imposed per average number of covered lives for plan years that end on or after October 1, 2021 and before October 1, 2022. For self-funded plans, the average number of covered lives is calculated by one of three methods: (1) the actual count method; (2) the snapshot method; or (3) the Form 5500 method.

Deadline and How to Report

The PCORI fee is due by July 31, 2022 and must be reported on Form 720.

Instructions are found here (see Part II, pages 8-9).

The Form 720 itself is found here (see Part II, page 2).

Form 720, as well as the attached Form 720-V to submit payment, must be used to report and pay the requisite PCORI fee to the IRS. While Form 720 is used for other purposes to report excise taxes on a quarterly basis, for purposes of this PCORI fee, it is only used annually and is due by July 31st of each relevant year.

As previously advised, plan sponsors of applicable self-funded health plans are liable for this fee imposed by Code section 4376. Insurers of specified health insurance policies are also responsible for this fee.

For plan years ending on or after October 1, 2017 and before October 1, 2018, the fee is $2.39 per covered life.
For plan years ending on or after October 1, 2018 and before October 1, 2019, the fee is $2.45 per covered life.
For plan years ending on or after October 1, 2019 and before October 1, 2020, the fee is $2.54 per covered life.
For plan years ending on or after October 1, 2020 and before October 1, 2021, the fee is $2.66 per covered life.
For plan years ending on or after October 1, 2021 and before October 1, 2022, the fee is $2.79 per covered life.

Again, the fee is due no later than July 31 of the year following the last day of the plan year.

As mentioned above, there are specific calculation methods used to configure the number of covered lives and special rules may apply depending on the type of plan being reported. While generally all covered lives are counted, that is not the case for all plans. For example, HRAs and health FSAs that are not excepted from reporting only must count the covered participants and not the spouses and dependents. The Form 720 instructions do not outline all of these rules.

More information about calculating and reporting the fees can be found here.

Questions and answers about the PCORI fee and the extension may be found here.

As you are well aware, the law and guidance are continually evolving. Please check with your Fraser Trebilcock attorney for the most recent updates.

This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.

Elizabeth H. Latchana specializes in employee health and welfare benefits. Recognized for her outstanding legal work, in both 2019 and 2015, Beth was selected as “Lawyer of the Year” in Lansing for Employee Benefits (ERISA) Law by Best Lawyers, and in 2017 as one of the Top 30 “Women in the Law” by Michigan Lawyers Weekly. Contact her for more information on this reminder or other matters at 517.377.0826 or elatchana@fraserlawfirm.com.

Brian T. Gallagher is an attorney at Fraser Trebilcock specializing in ERISA, Employee Benefits, and Deferred and Executive Compensation. He can be reached at (517) 377-0886 or bgallagher@fraserlawfirm.com.

IRS Announces 2022 Increase for Health FSAs

The IRS has just released its 2022 annual inflation adjustments, in which it announced that the Code section 125 dollar limitation on voluntary employee salary reductions to health flexible spending arrangements (health FSAs) is increasing to $2,850.

The IRS annual inflation adjustments for more than 60 tax provisions, including health FSAs, qualified transportation fringe benefits, adoption assistance, medical savings accounts, and qualified small employer HRAs, can be found in Rev. Proc. 2021-45.

With regard to the health FSA increase for 2022, Rev. Proc. 2021-45 reiterates that cafeteria plans can be written to allow carryovers of unused health FSA amounts up to a maximum of $570. However, by way of temporary relief and if the cafeteria plan was amended, leftover amounts in the dependent care FSA and/or the health FSA can be carried over from the 2021 plan year to the 2022 plan year. This is allowed under Notice 2021-15 and was previously described in our March 8, 2021 Client Alert.

Although open enrollment season is about to be in full swing for most, employers should ensure that their salary reduction agreements, plan documents, and related enrollment materials are updated to reflect any changes in benefits for the upcoming plan year.

This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.

Department of Labor Retains Independent Contractor Test

In January 2021, during the last days of the Trump administration, the U.S. Department of Labor (DOL) issued a “final rule,” to become effective in March of this year, changing the decades-longstanding independent contractor test under the Fair Labor Standards Act (“FLSA”). Under the proposed standard a “two core factor” test was to be applied, which would have narrowed the considerations for exclusion of workers from FLSA coverage as “independent contractors.”

However, on March 12, 2021, the DOL under President Biden announced proposed rulemaking, in effect blocking implementation of the Trump rule. On May 5, 2021, the Department announced a final rule withdrawing the proposed new rule, which the DOL characterized as overly employer-friendly, inconsistent with the purpose of the FLSA, and disruptive to the settled law. Of note, the principal deputy administrator for the DOL Wage and Hour Division stated: “When it comes to digital workers … we want to make sure that we continue to look at their needs, how they are interacting with their individual employers and whether or not they have the protections of the Fair Labor Standards Act.”.

Independent Contractor Test Under the FLSA

The net effect of these maneuverings is that the prior “economic reality” test remains in place without change. This means that the previous guidance from the DOL using a six-factor balancing test, based on Supreme Court precedent, will still be used to determine a worker’s classification. The six factors are:

The nature and degree of the employer’s control;
The permanency of the worker’s relationship with the employer;
Whether the worker, or the employer, provides the means and instrumentalities of the work, such as investment in facilities, equipment, or assistants;
The amount of skill, initiative, judgment, or foresight required for the worker’s services;
Whether the worker is at risk or benefit of profit or loss; and
The degree of integration of the worker’s services into the employer’s business.

IRS Test Remains Unchanged, Also

The IRS test, by comparison, was not changed during the Trump administration. The IRS you will recall uses the “20-factor” test. The test is comprised of three general categories; behavioral control, financial control and relationship of the parties.

The IRS factors are:

Degree of direction of work by employer.
Amount of training required to qualify.
Degree of integration worker’s duties into business.
Must work be done by worker or can worker contract performance to others?
Control of assistants.
Continuance/permanence of relationship.
Control over schedule.
Demand for full-time work.
On-site requirements.
Order and scheduling of work – dictated by worker or employer?
Reporting requirements.
Method of payment.
Compensation for business or travel expenses.
Use of tools, instrumentalities, and materials provided by employer.
Level of investment in employer operations.
Share in gain or loss.
Ability to work elsewhere.
Availability to work for general public.
Control over discharge.
Right to terminate

If you have questions about these changes, please contact Dave Houston or your Fraser Trebilcock attorney.

This alert serves as a general summary, and does not constitute legal guidance. All statements made in this article should be verified by counsel retained specifically for that purpose. Please contact us with any specific questions.

Fraser Trebilcock Shareholder Dave Houston has over 40 years of experience representing employers in planning, counseling, and litigating virtually all employment claims and disputes including labor relations (NLRB and MERC), wage and overtime, and employment discrimination, and negotiation of union contracts. He has authored numerous publications regarding employment issues. You can reach him at 517.377.0855 or dhouston@fraserlawfirm.com.

Client Alert: IRS Issues Important Information on COBRA Subsidies

The IRS has recently issued 86 questions and answers regarding the COBRA premium assistance requirements under the American Rescue Plan Act of 2021 (“ARPA”). See IRS Notice 2021-31.

As explained in previous Client Alerts, the ARPA requires that employers provide 100% COBRA subsidies to certain assistance eligible individuals from April 1, 2021 through September 30, 2021. Not only will COBRA be fully paid for these individuals during this time period, but eligible individuals who had previously declined COBRA (or who had elected COBRA and dropped it) have a second chance to elect and take advantage of the subsidized COBRA coverage. Notices of such subsidies and new election rights are due by May 31, 2021, so time is of the essence.

Q&A Highlights

Here are some highlights of these IRS Q&As but please note that the IRS guidance is extensive. This Client Alert just touches on some of the issues.

Who is an AEI?

Notice 2021-31 reiterates that an assistance eligible individual (AEI) is defined as an individual who (1) is a qualified beneficiary with respect to a period of COBRA continuation coverage during the period from April 1, 2021, through September 30, 2021, (2) who is eligible for that COBRA continuation coverage by reason of a qualifying event that is an involuntary termination of employment (except for gross conduct) or reduction of hours, and (3) who elects COBRA continuation coverage. This includes employees, spouses, and dependent children.

However, the IRS now explains that an individual can become an AEI more than once. As we know, being eligible for certain other group health plan coverage or Medicare will disqualify one from AEI status. Losing such eligibility at a later date may result in regaining AEI status. For example, an employee is terminated, loses coverage, and becomes an AEI on May 1, 2021. On June 1, 2021, the individual becomes eligible for his spouse’s employer’s group health plan and loses AEI status. However, on July 1, 2021, the spouse has an involuntary termination and loses coverage. Both the individual and spouse become AEIs as of July 1, 2021.

The notice goes on to provide that because eligibility for other group health coverage and/or Medicare will disqualify one from being an AEI, employers may required individuals to provide a self-certification or attestation that they are not eligible for any disqualifying group health plan coverage or Medicare. Employers must keep a record of such attestations.

The IRS clarifies that eligibility for other group health plan coverage will only create a loss in AEI status once that individual is permitted to enroll in that coverage (i.e., AEI status continues during a waiting period or until the next enrollment opportunity). Please note that the Emergency Relief Notices and the Outbreak Period extensions of deadlines have prolonged enrollment for HIPAA special enrollment events. So if an individual is able to enroll in a spouse’s plan (or another group health plan) due to HIPAA special enrollment extensions, that individual will not be an AEI. This can be a complicated determination.

Moreover, the IRS has explained that an individual who elected and remained on COBRA beyond the initial 18-month period due to a disability determination or a second qualifying event is also an AEI and eligible for the subsidy if the COBRA extended period falls within April 1 to September 30, 2021. For example, a qualified beneficiary who lost coverage 3 years ago due to termination/reduced hours may still be on COBRA as of April 1 due to a second qualifying event (e.g., divorce). The IRS recent Q&As clarified that these individuals will also be AEIs…

What is a Reduction in Hours?

Loss of coverage due to reduction in hours would cause the qualified beneficiary to potentially become an AEI regardless of whether the reduced hours is voluntary or involuntary. Furloughs and strikes are considered reduction in hours, so long as the employee and employer intend on maintaining the employment relationship.

What is an Involuntary Termination?

Many questions have arisen regarding involuntary terminations, such as whether resignations or non-renewal of temporary contracts can be deemed involuntary terminations. The determination of whether a termination is involuntary will be based on the facts and circumstances.

The IRS defines involuntary termination of employment as a “severance from employment due to the independent exercise of the unilateral authority of the employer to terminate employment, other than due to the employee’s implicit or explicit request, where the employee was willing and able to continue performing services.” See Q&A-24. This includes circumstances where the employee is terminated while the employee is off work due to illness or disability if there was a reasonable expectation that the employee would return to work after he or she had recovered. Moreover, an employee-initiated termination will also constitute an involuntary termination if it is due to employer action that resulted in a material negative change in employment, similar to a constructive discharge.

With regard to resignations or other terminations which are designated as voluntary, if the facts and circumstances indicate that the employee was able and willing to work and that the employer would have terminated the employee absent the resignation or “voluntary“ termination, the IRS will deem this an involuntary termination.

A resignation resulting from a material change in the geographic location of employment for the employee is also deemed an involuntary termination.

An employee who leaves employment due to health concerns, however, is generally not a involuntary termination. Neither is an employee who terminates due to child-care reasons.

Some of these circumstances could result in AEI status if the individual lost coverage due to a reduction in hours. Moreover, if the employer involuntarily and materially reduced the employee’s hours, an employee who terminates employment in response will be deemed to have been involuntarily terminated.

Temporary employees also present an interesting situation. Typically, temporary employees are hired on a short-term contractual basis. Whether the non-renewal of the contract at its expiration is deemed an involuntary termination is again a factual determination.

Q-34. Does an involuntary termination of employment include an employer’s decision not to renew an employee’s contract, including for an employee whose employer is a staffing agency?

A-34. Generally, yes. An employer’s decision not to renew an employee’s contract will be considered an involuntary termination of employment if the employee was otherwise willing and able to continue the employment relationship and was willing either to execute a contract with terms similar to those of the expiring contract or to continue employment without a contract. However, if the parties understood at the time they entered into the expiring contract, and at all times when services were being performed, that the contract was for specified services over a set term and would not be renewed, the completion of the contract without it being renewed is not an involuntary termination of employment.

See Q&A-34.

What Plans is the Subsidy Available For?

The IRS confirms that the subsidy is available for any group health plan subject to COBRA (including certain HRAs, as well as vision-only and dental-only plans), except for health FSAs offered under Code section 125 plans.

Extended Election Period Information

With regard to AEIs who previously had not elected or dropped their COBRA coverage, they may now elect COBRA during the extended election period. This includes spouses and dependents who were covered under the group health plan along with the employee on the day before the involuntary termination or reduced hours resulting in the loss of coverage.

The IRS clarifies that these AEIs may waive COBRA for any period before their election. If COBRA for an HRA is elected during the extended period, the AEI is not entitled to reimbursement of expenses incurred after the qualifying event and before the first period of COBRA coverage beginning on or after April 1, 2021.

Tax Credit Information

Those to whom COBRA premiums are payable (generally the employer for most purposes) are entitled to a refundable tax credit against their share of Medicare taxes. This is now allowed under newly added Code section 6432. Notice 2021-31 includes numerous questions and answers regarding the calculation of this tax credit as well as how to claim it.

Conclusion

This Client Alert sets forth highlights of these Q&As but by no means addresses them all. Moreover, the IRS indicates further guidance may be forthcoming. Please seek out advice on these complicated issues.

As you are well aware, the law and guidance are rapidly evolving in this area. Please check with your Fraser Trebilcock attorney for the most recent updates.

Fraser Trebilcock is committed to providing you valuable information. Please watch for upcoming alerts on these and other topics.

We have created a response team to the rapidly changing COVID-19 situation and the law and guidance that follows, so we will continue to post any new developments. You can view our COVID-19 Response Page and additional resources by following the link here. In the meantime, if you have any questions, please contact your Fraser Trebilcock attorney.

Client Alert: IRS Clarifies Taxation of Dependent Care Benefits Due to Extended Grace Periods or Expanded Carryovers

In Notice 2021-26, the IRS clarifies the taxable nature of benefits under dependent care assistance programs (“DCAPs”) that adopted the extended grace period or expanded carryover options for 2021 and/or 2022. See Notice 2021-26 (irs.gov).

Specifically, the IRS states that amounts which are available under the extended grace period or expanded carryover options will be excludable from the employees’ gross income if:

The amounts would have been excluded from employees’ income had they been used during the original taxable year ending in 2020 or 2021; and
If the available amounts due to the extended grace period or expanded carryover options are actually used during the following taxable year (i.e., 2021 as extended from 2020, or 2022 as extended from 2021).

Additionally, these DCAP benefits will not be counted toward the maximum exclusion from gross income that is applicable to other DCAP benefits for the 2021 and 2022 taxable years. Under previous guidance, the maximum DCAP exclusion from income has been increased from $5,000 to $10,500 (or for taxpayers who are married but filing separately, from $2,500 to $5,250) for calendar year 2021. Special rules apply for non-calendar year DCAPs.

Background

Traditionally, qualifying DCAP benefits utilized during a calendar year are subject to an income exclusion of $5,000 (or $2,500 in the case of married individuals filing separate returns). These benefits are generally forfeited at the end of the plan year, unless the plan has adopted a 2 ½ grace period. Carryovers have not previously been allowed for DCAPs as they have for health FSAs.

However, due to the COVID-19 pandemic, numerous temporary relief was implemented, including for DCAP benefits. Under the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (also known as the Consolidated Appropriations Act, 2021 or CAA) and IRS Notice 2021-15, the following relief was provided with regard to DCAPs:

Expanded Carryover Rules

Carryover to the 2021 Plan Year: This provision allows any unused benefits or from plan years ending in 2020 to be carried over to the plan year ending in 2021;
- Significantly, DCAPs were not previously allowed to have a carryover provision.
Carryover to the 2022 Plan Year: This provision allows any unused benefits or contributions from plan years ending in 2021 to be carried over to the plan year ending in 2022.

Extended Grace Periods

Grace Periods: DCAPs may adopt an extended grace period for plan years ending in 2020 or 2021, which is extended from the traditional two months and 15 days to a full 12 months after the end of such plan year in order for unused benefits or contributions to be utilized.

Thereafter, the American Rescue Plan Act (“ARPA”) temporarily amended Code section 129(a) to increase the amount of dependent care expenses that may be excluded from gross income.

DCAPs have historically been capped at reimbursing $5,000 per calendar year. However, under the ARPA, and only for taxable years beginning after December 31, 2020 and before January 1, 2022, DCAPs can reimburse over double! The maximum amount to be excluded for calendar year 2021 is now $10,500 (or $5,250 for married individuals filing single returns).

Note: To implement the carryovers or grace periods, or to increase the DCAP election amount to $10,500 for calendar year 2021, employers must amend their plans. Although generally Code section 125 cafeteria plans cannot be amended retroactively, the ARPA states that retroactive amendments are allowed for this purpose as long as: (1) the amendment is adopted no later than the last day of the plan year in which it is effective, and (2) the plan is operating consistent with the term of the amendment as of its effective date.

We thought this was the welcome news for employers who were struggling with allowing carryovers or grace periods for DCAPs that would exceed the $5,000 max. However, the IRS further expanded and clarified taxation relief in its newest guidance, Notice 2021-26 (irs.gov).

IRS Notice 2021-26

In Notice 2021-26, the IRS clarifies that DCAP amounts carried over (or available due to the extended grace period) from 2020 to 2021 or from 2021 to 2022 are excluded from income when used in that subsequent year if they would have been excluded from income if used during the original taxable year ending in 2020 or 2021.

Moreover, the amounts carried over (or available due to the extended grace period) are also disregarded for purposes of the income exclusion limits in that subsequent tax year. Take the following example: An employee elects $5,000 in 2020 but used none of it. The full $5,000 is carried over to 2021. Additionally, the employee elects $10,500 (as allowed by ARPA) for the 2021 tax year. If the employee incurs $15,500 in DCAP expenses in 2021, none of the $15,500 will result in taxable income. This is because the $5,000 carryover amount is disregarded, and under ARPA, up to $10,500 of DCAP expenses can be excluded for 2021.

The IRS includes some examples to explain how this works with both calendar year plans as well as non-calendar year plans.

Moreover, with regard to the ARPA increase to $10,500 of DCAP benefits for which employees may exclude, Notice 2021-26 clarifies that this is for the 2021 taxable year only (generally the calendar year). Therefore, a DCAP that runs on a non-calendar year basis, starting in 2021 and ending in 2022 will not have this full relief available. The Notice provides that the increased exclusion amount (i.e., in most cases the amount over $5,000) will not apply to the reimbursement of expenses incurred during the 2022 portion of the plan year.

If you have any questions about these products or would like assistance with updating documentation or employee communications, feel free to contact us.

As you are well aware, the law and guidance are rapidly evolving in this area. Please check with your Fraser Trebilcock attorney for the most recent updates.

Fraser Trebilcock is committed to providing you valuable information. Please watch for upcoming alerts on these and other topics.

IRS Announces 2022 Adjustments for HSAs & Excepted-Benefit HRAs

The IRS has released its 2022 annual inflation adjustments for Health Savings Accounts (“HSAs”) as determined under Section 223 of the Internal Revenue Code. Specifically, IRS Revenue Procedure 2021-25 provides the adjusted limits for contributions to a HSA, as well as the high deductible health plan (“HDHP”) minimums and maximums for calendar year 2022.

Additionally, Revenue Procedure 2021-25 sets forth the maximum amount that may be made newly available for excepted-benefit health reimbursement arrangements (“HRAs”) as provided under 26 CFR 54.9831-1(c)(3)(viii).

The 2022 HSA/HDHP limits are as follows:

Annual Contribution Limit
- Single Coverage: $3,650
- Family Coverage: $7,300
HDHP-Minimum Deductible
- Single Coverage: $1,400
- Family Coverage: $2,800
HDHP-Maximum Annual Out-of-Pocket Expenses (including deductibles, co-payments and other amounts, but not including premiums)
- Single Coverage: $7,050
- Family Coverage: $14,100
The catch-up contribution for eligible individuals age 55 or older by year end remains at $1,000.

Plans and related documentation, including employee communications, should be updated to reflect these new limits which are effective for calendar year 2022.

As always, please keep in mind that participation in a health FSA (or any other non-HDHP) will result in HSA ineligibility, unless the health FSA is limited to: (1) limited-scope dental or vision excepted benefits; and/or (2) post-deductible expenses.

The 2022 EBHRA limit is as follows:

The maximum amount that may be made newly available for the plan year for an excepted benefit HRA (“EBHRA) is $1,800. This amount is effective for plan years beginning in 2022 (but it is unchanged since EBHRA’s inception in 2020).

If you have any questions about these products or would like assistance with updating documentation or employee communications, feel free to contact us.

As you are well aware, the law and guidance are rapidly evolving in this area. Please check with your Fraser Trebilcock attorney for the most recent updates.

Fraser Trebilcock is committed to providing you valuable information. Please watch for upcoming alerts on these and other topics.

[Client Alert] IRS Clarifies Cafeteria Plan Flexibility into 2022: Amendments Required to Take Advantage

The Taxpayer Certainty and Disaster Tax Relief Act of 2020 (also known as the Consolidated Appropriations Act, 2021 or CAA) was signed into law on December 27, 2020. With regard to flexible spending accounts (FSAs), Section 214 of the CAA provided great flexibility for plan years 2021 and 2022. Please see our January 11, 2021 Client Alert. However, tax consequences of these relaxed rules were unclear.

On February 18, 2021, the IRS provided the necessary clarity by releasing Notice 2021-15.

Notice 2021-15 imposes some additional limitations and provides some expansions to Section 214 of the CAA. Significantly, the Notice expands the mid-year change in election relief to group health plans as long as certain requirements are met. The Notice further addresses the impact on HSAs, COBRA, and nondiscrimination testing with regard to FSA carryovers and grace periods. Moreover, it tightened the plan amendment timeline. Finally, it allows additional time for health FSA and HRA plans to be amended to include OTCs and menstrual care products.

The Notice reiterates the loosened rules as provided in the CAA, with the following clarifications:

Expanded Carryover Rules

Carryover to the 2021 Plan Year: This provision allows any unused benefits or contributions in both dependent care and health FSAs from plan years ending in 2020 to be carried over to the plan year ending in 2021;
- The carryover must follow rules similar to the health FSA rules… however, while health FSA carryovers are normally subject to a $550 cap [as indexed], the Notice specifically states that any unused benefits or contributions may be carried over.
- Significantly, dependent care FSAs were not previously allowed to have a carryover provision.
Carryover to the 2022 Plan Year: This provision allows any unused benefits or contributions in FSAs from plan years ending in 2021 to be carried over to the plan year ending in 2022;
- We find this provision important especially in situations involving the dependent care FSAs. These FSAs have a maximum reimbursement of $5,000 per calendar year in order to be excluded from gross income. See Code section 129(a). If an employee is allowed to carry over unused contributions into 2021 from 2020, but had also elected a full $5,000 for plan year 2021, s/he would have an overfunded account. This can be handled in one of two ways: (1) carrying over the extra funds from 2021 to 2022, and/or (2) prospective election changes for FSAs for plan years ending in 2021 without regard to the strict status change rules (see the Change in Election section below). With regard to the latter, employees can reduce their dependent care election for 2021 and prevent future contributions from being made.
  - Note: While Example 3 of the Notice indicates that more than $5,000 can be reimbursed, we recommend exercising caution here. Code section 129(a), which clearly limits the dependent care exclusion from gross income to $5,000 of services rendered during a taxable year, was not amended. Code 129(a)(2)(A) says: “The amount which may be excluded under paragraph (1) for dependent care assistance with respect to dependent care services provided during a taxable year shall not exceed $5,000.”
- While widely understood, the Notice clarifies that carryover of amounts in a general-purpose FSA will make an employee ineligible for HSAs. Employers may amend their plans to convert general-purpose FSAs to ones compatible with HSAs (limited-purpose or post-deductible) or may amend their cafeteria plans to allow employees to opt out of the carryover feature to preserve their eligibility for HSAs.
- This limited relief allows the Expanded Carryover to be adopted, regardless of whether the plan currently has a grace period or carryover or not (having carryovers and grace periods in the same years normally would not be allowed – see Notice 2013-71).
- Moreover, the Notice provides that an employer may limit the carryover amount and may limit the carryover to a specified date during the plan year.
- Plan amendments are required.
However, an employer may not adopt both the Extended Grace Period and Expanded Carryover rules with respect to a particular FSA.

Extended Grace Periods

Grace Periods: Health or dependent care FSAs may adopt an extended grace period for plan years ending in 2020 or 2021, which is extended from the traditional two months and 15 days to a full 12 months after the end of such plan year in order for unused benefits or contributions to be utilized.
- As with the Expanded Carryovers, Extended Grace Periods in a general-purpose FSA will make an employee ineligible for HSAs. Employers may amend their plans to convert general-purpose FSAs to ones compatible with HSAs (limited-purpose or post-deductible) or may amend their plans to allow employees to opt out of the grace period feature to preserve their eligibility for HSAs.
- This limited relief allows the Extended Grace Period to be adopted, regardless of whether the plan currently has a grace period or carryover or not (having carryovers and grace periods in the same years normally would not be allowed – see Notice 2013-71).
- An employer may limit the grace period to a specified date during the plan year.
- Plan amendments are required.
Post-Termination Health FSA Reimbursements: Health FSAs are now allowed to continue to reimburse former participants for claims incurred post-termination similar to dependent care FSAs, namely:
- Employees who ceased participation in the plan during calendar years 2020 or 2021 may continue to receive reimbursements from unused benefits or contributions through the end of the plan year in which participation ceased (including any grace period).
- Cessation of participation includes termination of employment, change in employment, or a new election during calendar year 2020 or 2021.
- This is only allowed if Extended Grace Period is adopted. It is not applicable for Expanded Carryovers…
- COBRA still applies.
- An employer may limit this to a specified date during the plan year.
- Employers may limit the amount in a health FSA to the amount of contributions made by the employee from the beginning of the plan year in which the employee ceased to be a participant (i.e., not including carryover/grace period amounts).
- Participation in a general-purpose FSA will make an employee ineligible for HSAs. Employers may amend their plans to convert general-purpose FSAs to ones compatible with HSAs (limited-purpose or post-deductible) or may amend their plans to allow employees to opt out of the extended participation feature to preserve their eligibility for HSAs.
- Plan amendments are required.
However, an employer may not adopt both the Extended Grace Period and Expanded Carryover rules with respect to a particular FSA.

Dependent Care FSA Age Out Rule

Dependent Care FSA Age Out Rule: In order for eligible employees to receive reimbursement for dependent care assistance, their dependent must be under the age of 13 when the expenses were incurred. However, for employees who were enrolled in the dependent care FSA (as long as the regular enrollment period was on or before January 31, 2020), age 14 is substituted for age 13 for the last plan year, and, if the employee had an unused balance in the FSA for such plan year, age 14 may also be substituted for the subsequent plan year with respect to those unused amounts.
Plan amendments are required.

Nondiscrimination

Amounts available due to either the Expanded Carryover or Extended Grace Period, as well as the Dependent Care FSA Age Out Rule, are not taken into account for Section 125 and/or Section 129 nondiscrimination testing. However, otherwise, the nondiscrimination rules remain in effect.

Normal Rules Resume for Plan Years Ending In/After 2022

Normal FSA rules resume for plan years ending in or after 2022,
- Calendar year plans with regular grace periods will allow all amounts remaining at the end of the 2022 plan year to be used during the first 2.5 months of 2023.
- Calendar year plans with regular carryovers will allow up to $550 (as inflated) to be carried over and used in any month of 2023.
- Carryovers, as previously, will only be allowed for health FSAs.

Change in Election

Change in Election for FSAs: Similar to IRS Notice 2020-29, but for plan years ending in 2021, health and dependent care FSAs may allow employees to make mid-year election changes prospectively without regard to the rigid change in status rules Under Treas. Reg. 1.125-4.
Change in Election for Group Health Plans (health / dental / vision):
- Although the CAA did not so provide, Notice 2021-15 also allows mid-year changes under a cafeteria plan for group health plans without regard to change in status rules as long as certain requirements are met.
- Similar to relief provided by Notice 2020-29, an employer may amend one or more of its Section 125 cafeteria plans to allow employees to:
  - (1) make a new election for employer-sponsored health coverage on a prospective basis, if the employee initially declined to elect employer-sponsored health coverage;
  - (2) revoke an existing election for employer-sponsored health coverage and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis (including changing enrollment from self-only coverage to family coverage);
  - (3) revoke an existing election for employer-sponsored health coverage on a prospective basis, provided that the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer.
- The Notice includes sample written attestation language.
Plan amendments are required.
The Notice clarifies that health FSAs may only be used for medical care expenses and dependent care FSAs may only be used for dependent care expenses.
Employers can limit election changes in a plan year to increases in coverage, decreases in coverage, number of changes, and others.
Under this relief, employers may allow employees to change from general-purpose health FSAs to HSA-compatible FSAs for a portion of the year.
No cash outs of FSAs are allowed.

COBRA

The Notice clarifies the application of COBRA with regard to these unique changes:
- Extended Grace Period: Health FSA spend down amounts for terminated employees will not prevent individuals with qualifying events from having a loss of coverage (i.e., they will still have the right to COBRA), and the employer must provide the COBRA notice.
- Expanded Carryover or Extended Grace Period: If a terminated employee qualifies for COBRA, s/he may elect and access the additional funds made available due to the carryover or grace period. However, these excess amounts will not be included when determining the applicable COBRA premium.

Amendments

To allow any of the above provisions, the cafeteria plan or arrangement must be amended to allow for such provisions.
Rarely are cafeteria plan amendments allowed to take retroactive effect, however, this Notice provides some of those rare opportunities. A cafeteria plan amendment to adopt one of the above provisions may be implemented retroactively if:
- (1) the amendment is adopted not later than the last day of the first calendar year beginning after the end of the plan year in which the amendment is effective, and
- (2) the plan or arrangement is operated consistent with the terms of the amendment during the period beginning on the effective date of the amendment and ending on the date the amendment is adopted.
For a calendar year plan, if 2020 FSA amounts carry over to 2021, the amendment must be adopted by December 31, 2021. For a non-calendar year plan where the last day of the applicable plan year ends in 2021, the plan amendment must be adopted by December 31, 2022.
With regard to amendments to allow over-the-counter drugs and menstrual care products to be reimbursed from health FSAs, the Notice also clarifies that retroactive amendments are allowed:
- Under the CARES Act, FSAs/HRAs (and HSAs) may reimburse over-the-counter drugs and menstrual care products incurred after December 31, 2019 if the FSA/HRA is amended. Typically, as mentioned above, Code section 125 only allows reimbursement after the plan is amended (and Code section 105(b) only allows exclusion from gross income if the plan covers the expense on the date the expense was incurred). However, this Notice clarifies amendments and coverage can be retroactive to January 1, 2020.

Form W-2 Reporting

Amounts contributed to dependent care FSAs are required to be reported in Box 10 (the employee’s salary reduction amount elected plus any employer matching contributions). However, this does not need to include account amounts that remain available during the grace period. The Notice clarifies that this rule continues to apply for with regard to amounts available due to Expanded Carryovers and Extended Grace Periods.

Conclusion

Obviously there are numerous relaxed rules contained within this Notice, each with its own set of requirements and implications. As always, consultation is important to determine if these changes will be of benefit to employers and their employees. Many factors should be considered, such as nondiscrimination rules, adverse selection with allowing mid-year changes, whether extending health FSA reimbursement provisions will negatively affect health savings accounts, and additional required employee communications.

Plan sponsors must determine whether they wish to proceed with any of the above provisions, largely in part depending on whether typical FSA rules would result in unprecedented forfeitures due to the pandemic. If so, they must communicate such provisions with their workforce and must administer the cafeteria plan or arrangement accordingly as of the amendment’s effective date, even if the amendment is adopted at a later date.

As you are well aware, the law and guidance are rapidly evolving in this area. Please check with your Fraser Trebilcock attorney for the most recent updates.

Client Alert: Health FSA Maximum Remains the Same for 2021

The IRS has just released its 2021 annual inflation adjustments, in which it announced that the Code section 125 dollar limitation on voluntary employee salary reductions to health flexible spending arrangements (health FSAs) is staying at $2,750.

The IRS annual inflation adjustments for more than 60 tax provisions, including health FSAs, can be found in Rev. Proc. 2020-45. This guidance reiterates that cafeteria plans can be written to allow carryovers of unused health FSA amounts up to a maximum of $550.

This alert serves as a general summary, and does not constitute legal guidance. Please contact us with any specific questions.

IRS Announces 2021 Increases for HSAs

The IRS has released its 2021 annual inflation adjustments for Health Savings Accounts (HSAs) as determined under Section 223 of the Internal Revenue Code. Specifically, IRS Revenue Procedure 2020-32 provides the adjusted limits for contributions to a Health Savings Account (“HSA”), as well as the high deductible health plan (“HDHP”) minimums and maximums for calendar year 2021.

The 2021 limits are as follows:

Annual Contribution Limit
- Single Coverage: $3,600
- Family Coverage: $7,200
HDHP-Minimum Deductible
- Single Coverage: $1,400
- Family Coverage: $2,800
HDHP-Maximum Annual Out-of-Pocket Expenses (including deductibles, co-payments and other amounts, but not including premiums)
- Single Coverage: $7,000
- Family Coverage: $14,000
The catch-up contribution for eligible individuals age 55 or older by year end remains at $1,000.

Plans and related documentation, including employee communications, should be updated to reflect these new limits for 2021.

This alert serves as a general summary of lengthy and comprehensive new provisions of the Internal Revenue Code. It does not constitute legal guidance. Please contact us with any specific questions.

Client Alert: Delay of Deadline to Furnish Forms 1095-B and 1095-C to Individuals & Related Relief

Statements to Individuals

The Internal Revenue Service (“IRS”) has extended the deadline for 2020 Information Reporting by employers (and other entities) to individuals under Internal Revenue Code sections 6055 and 6056 by just over a month. However, the deadline for these entities to file with the Internal Revenue Service (IRS) remains the same.

IRS Notice 2020-76 extends the due dates for the following 2020 information reporting Forms from January 31, 2021 to March 2, 2021:

2020 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage
2020 Form 1095-B, Health Coverage

Please note that no further extension beyond the March 2, 2020 deadline is allowed. Therefore, this deadline for furnishing the Forms to individuals must be met.

Reporting to IRS

However, the due dates for filing these Forms and their Transmittals with the IRS remains unchanged. Specifically, the due date for filing the following documents with the IRS is February 28 for paper filings; however, if filing electronically, the due date is March 31 (employers who are required to file 250 or more Forms must file electronically):

2020 Form 1094-B, Transmittal of Health Coverage Information Returns, and the 2020 Form 1095-B, Health Coverage
2020 Form 1094-C, Transmittal of Employer-Provided Health Insurance Offer and Coverage Information Returns, and the
2020 Form 1095-C, Employer-Provided Health Insurance Offer and Coverage

Additional extensions may still be available for filing these Forms with the IRS.

Penalty Relief for Form 1095-B Statement to Responsible Individuals

The Notice addresses that as the individual shared responsibility payment was reduced to zero for months beginning after December 31, 2018, and because an individual will not need the information on Form 1095-B to compute his or her federal tax liability or to file an income tax return with the IRS, the Treasury Department and the IRS have determined that relief from penalties associated with furnishing a statement under section 6055 is appropriate. Therefore, the IRS will not assess a penalty under section 6722 against reporting entities who fail to furnish a Form 1095-B to responsible individuals if two conditions are met:

First, the reporting entity posts a notice prominently on its website stating that responsible individuals may receive a copy of their 2020 Form 1095-B upon request, accompanied by an email address and a physical address to which a request may be sent, as well as a telephone number that responsible individuals can use to contact the reporting entity with any questions.
Second, the reporting entity furnishes a 2020 Form 1095-B to any responsible individual upon request within 30 days of the date the request is received.

This relief does not extend to the requirement that applicable large employers (ALEs) must furnish Forms 1095-C to full-time employees. Those statements must continue to be provided. However, the penalty relief will apply to employees enrolled in an ALE’s self-insured health plan who are not full-time employees for any month of 2020.

Last Year for Good-Faith Transition Relief

IRS Notice 2020-76 also extends the good-faith transition relief from Code section 6721 and 6722, which are the Code sections imposing penalties for filing incorrect or incomplete information on the return or statement. Specifically, entities showing that they have made good faith efforts to comply may avoid penalties for incorrect or incomplete information reporting. However, relief is not available to entities who fail to file returns or furnish the statements, miss a deadline, or otherwise had not made good faith efforts to comply. The Notice states that in determining good faith, the IRS “will take into account whether an employer or other coverage provider made reasonable efforts to prepare for reporting the required information to the Service and furnishing it to employees and covered individuals, such as gathering and transmitting the necessary data to an agent to prepare the data for submission to the IRS or testing its ability to transmit information to the IRS.” However, this is the last year the IRS and Treasury Department intend on providing this transition relief.

Indications this may be the Last Year for Statement Relief

Last, the IRS indicates that unless it receives comments explaining why the relief afforded in this notice continues to be necessary, no relief relating to the furnishing requirements under sections 6055 and 6056 will be granted in future years.

Taxpayers and reporting entities are strongly encouraged to submit comments electronically via the Federal eRulemaking Portal at www.regulations.gov (type “IRS- 2020-0037” in the search field on the regulations.gov homepage to find this notice and submit comments).
Alternatively, taxpayers and reporting entities may mail comments to: Internal Revenue Service, Attn: CC:PA:LPD:PR (Notice 2020-76) Room 5203, P.O. Box 7604, Ben Franklin Station, Washington, D.C. 20044
Comments must be submitted by February 1, 2021.

You can find the full Notice here: https://www.irs.gov/pub/irs-drop/n-20-76.pdf.

If you should have questions regarding employer reporting requirements or other ACA mandates, the Employee Benefits Department at Fraser Trebilcock can assist.