2021 Appropriations Bill Includes New and Expanded Relief for Employee Benefit Plans


By Hunton Andrews Kurth


The Consolidated Appropriations Act, 2021 (the “Act”) was passed and signed into law in late December 2020. In addition to funding for the current fiscal year, the Act also includes numerous provisions addressing employee benefit plans and providing a range of relief provisions relating to the COVID-19 pandemic and other disasters. While many of these changes are new, some of them extend or add on to previous legislation issued earlier in 2020 under the CARES Act. This alert describes the key provisions of the Act applicable to employer-sponsored welfare and retirement plans.


Welfare Benefits


Flexible Spending Account Carryovers and Grace Period Extensions Permitted for Plan Years Ending in 2020 and 2021. The Act provides employers with two potential options to provide relief to employees with unused health and/or dependent care flexible spending account (“FSA”) amounts for the plan years ending in 2020 and 2021. (The previous guidance issued under IRS Notices 2020-29 and 2020-33 addressed unused amounts from 2019 only.)

  • First, the Act allows employers to add (or, in the case of a health care FSA, extend) a carryover feature to cafeteria plans that will allow participants to carry over any unused amounts remaining in a health and/or dependent care FSA at the end of the 2020 and 2021 plan years to the following plan year. Normally, the carryover feature is available to health care FSAs only, and the maximum permitted carryover amount is $550 (now indexed for cost of living changes under IRS Notice 2020-33). The Act expands the carryover feature to dependent care FSAs and allows an unlimited amount to be carried over under either type of FSA into the 2021 and 2022 plan years.

  • Second, for plans that provide for a FSA grace period, in the alternative, employers can extend that grace period to 12 months after the end of the plan year. This increases the maximum grace period from 2½ months to 12 months for the plan years ending in 2020 and 2021.

Both options effectively give employees up to an extra 12 months to utilize unused health and dependent care FSA amounts from 2020 and 2021. Employers with health savings account (“HSA”) arrangements should note that participants with health care FSA funds left at the end of a plan year are not permitted to make HSA contributions until the end of the grace period or carryover period (unless allocated to a “limited purpose” HSA-compliant FSA). In these circumstances, employers utilizing the carryover option may want to permit HSA participants to waive the carryover in order to be eligible to contribute to an HSA.


The carryover relief and grace period extension under the Act are optional. Plan sponsors may implement these changes for both the health and dependent care FSAs or just one of the FSAs. In addition, plan sponsors may elect to utilize this relief for the 2020 or 2021 plan years or both. Note, though, that under existing IRS guidance, an FSA cannot have both a carryover and a grace period.


Health Care FSA Reimbursements for Terminated Participants. FSAs may be amended to permit employees who cease participation in a health care FSA during the 2020 or 2021 plan year (due to termination of employment, for example) to continue to receive reimbursements of unused FSA contributions for expenses incurred through the end of the plan year in which their participation ceased (including any extended grace period provided for under the plan’s terms, as described above). Generally, participants in health care FSAs may not be reimbursed for expenses incurred following termination unless they are eligible for and elect COBRA continuation coverage.


Carry-Forward Opportunity for Aged-Out Dependents. Normally, a dependent care FSA can be used only to pay for qualifying dependent care expenses of a child who is under age 13. The Act temporarily increases this maximum age to 14 for the last plan year for which the regular enrollment period was on or before January 31, 2020 (in most cases, the 2020 plan year). However, the Act provides that, for a qualifying dependent who turned age 13 during the last plan year, the dependent care FSA may be amended to allow for reimbursement of expenses related to such child’s dependent care for the remainder of the plan year. In addition, the dependent care FSA can also be amended to allow participants to carry over unused amounts to the subsequent plan year and apply those amounts to the dependent care expenses until the dependent reaches age 14.


Permitted Midyear Election Changes for Flexible Spending Accounts During the 2021 Plan Year. Similar to the relief provided under IRS Notice 2020-29 for 2020 plan year elections, the Act permits employers to allow employees to elect or change an existing health FSA or dependent care FSA election for the 2021 plan year, on a prospective basis, at any time during the year without a “change in status” event. Unlike prior IRS relief, this midyear election change opportunity for 2021 does not apply to medical, dental, and/or vision coverage elections. Similar to the relief for 2020, it appears likely that plan sponsors should be able to restrict participants from decreasing their annual contribution amount below the amount that has already been reimbursed for the 2021 plan year. The sponsors should be able to choose to limit the timeframe for such midyear election changes and/or allow for election increases and/or decreases, terminations, enrollments, or any combination thereof. Subsequent IRS guidance may provide additional clarity.


Amendments Required for FSA-Related Changes. Amendments for any of the FSA-related changes described above must be adopted by the end of the first calendar year following the plan year in which the amendment is made effective. For example, a plan adopting the carryover for plan year ending December 31, 2020 must adopt the related plan amendment by December 31, 2021. The plan, however, must be operated in accordance with the terms of the amendment from the date the FSA changes were made in operation.

Surprise Medical Billing. The Act also sets forth new rules beginning in 2022 that prevent individuals from being balance billed without their consent when they seek emergency care, when transported by an air ambulance, or when receiving non-emergency care at an in-network hospital but unknowingly are treated by out-of-network physicians or other specialty care services. The Act further limits the ability of such providers to charge an employer for the excess costs.


Other Health Plan Changes. The Act includes new mandates for group health plans to implement requirements for insurers and healthcare providers to adopt cost transparency guidelines. The Act also requires that group health plans and health insurance issuers be able to report to the Health and Human Services, Department of Labor, or the state insurance regulator, as applicable, within 45 days of enactment, a detailed analysis regarding compliance with the Mental Health Parity and Addiction Equity Acts (“MHPAEAs”), which require parity between medical and surgical benefits and mental health and substance use disorder benefits. In this regard, the Act directs the Departments to develop a reporting process whereby this data is submitted to the Departments for evaluation of compliance.


Employer-Sponsored Retirement Plans


Safe Harbor to Avoid a Partial Plan Termination. IRS rules require that, in the event of a partial plan termination, all affected participants must become 100 percent vested. Whether a partial termination occurs is based on the facts and circumstances, but the IRS has previously indicated that a turnover rate of 20 percent or higher creates a rebuttable presumption that a partial termination has occurred. The Act provides that a retirement plan will not be treated as having a partial termination for any plan year, including the period from March 13, 2020 through March 31, 2021, as long as the number of active participants covered by the plan on March 31, 2021 is at least 80 percent of the number of active participants covered on March 13, 2020. This relief should provide some flexibility for plan sponsors that have been dealing with layoffs, furloughs, and other changes to their workforce.


Coronavirus Related Distributions Permitted from Money Purchase Pension Plans. The Act expands the special coronavirus distribution provisions of the CARES Act by allowing in-service withdrawals from money purchase pension plans to qualify as coronavirus-related distributions. This change is effective as of the original enactment of the CARES Act; however, since the opportunity to take a coronavirus distribution ended on December 31, 2020, this provision has minimal impact other than for money purchase pension plans that already allowed these distributions during 2020.


Non-COVID Related Disaster Distributions. The Act also includes several provisions expanding distribution rules relating to qualifying disasters other than COVID-19. For this purpose, a qualified disaster must have occurred between December 28, 2019 and December 27, 2020 (the effective date of the Act) and have been a declared disaster under the Stafford Act between January 1, 2020 and February 25, 2021 (60 days after the effective date of the Act). For example, this could include the 2020 California wildfires and 2020 hurricanes, such as Hurricane Laura. Qualified disaster distributions can be made up until June 25, 2021, which is 180 days after the enactment of the Act. Key provisions include the following:

  • Qualified retirement plans, including money purchase pension plans, may permit qualified disaster distributions of up to $100,000 (minus any qualified disaster distributions previously received by the individual) to any qualified individual. For this purpose, a “qualified individual” is an individual whose principal residence is in the qualified disaster area and has sustained an economic loss due to the qualified disaster. Recipients can spread the income inclusion out over three years, and can repay the distribution within the three-year period following the distribution date in one or more contributions.

  • Plans may permit repayment of hardship withdrawals by individuals who received hardship distributions to purchase or construct a principal residence in a qualified disaster area, but who did not use the funds due to the qualified disaster. The distribution must have been received within the period beginning 180 days before the qualified disaster and ending 30 days after the end of the qualified disaster. Repayment must be made on or before June 25, 2021 (180 days after the enactment of the Act).

  • Limits on plan loans made between December 27, 2020 and June 25, 2021 are increased to the lesser of $100,000 or 100 percent of the account balance for qualified individuals (as defined above). In addition, for qualified individuals with outstanding plan loans as of the first day of a qualified disaster period, any loan payments that are otherwise due between the first day of a qualified disaster period and 180 days after the end of the disaster period are delayed until the later of (a) one year after the original due date or (b) June 25, 2021 (180 days after the enactment of the Act). Subsequent repayments are amortized and the delay period is disregarded for purposes of the five-year limit on loan repayment.

Amendments to reflect the above provisions must be made on or before the first plan year beginning on or after January 1, 2022 (or January 1, 2024 for governmental plans).

As indicated above, this alert addresses the provisions of the Act addressing employer-sponsored welfare and retirement benefit plans.


Source: Hunton Andrews Kurth

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