American Rescue Plan Act of 2021 – Important FSA Changes
Signed into law on March 11, 2021, the American Rescue Plan Act (ARPA) provides health and wellness opportunities to individuals impacted by COVID-19. Last week, we featured an article explaining how the ARPA impacts employers in regards to COBRA coverage. This week, we’ll take a closer look into dependent care flexible spending account (FSA) contributions changes under the new law.
The ARPA increases the limit for dependent care FSA contributions in 2021 from $5,000 to $10,500. While this increase to the maximum contribution amount only applies to 2021, there’s a chance this change will become a permanent option. It’s important that employers learn as much as they can about how this change might impact their business.
What This Means for Employers
The ARPA dependent care FSA limit increase is not mandatory. Employers are not required to implement this temporary change. Employers that do wish to incorporate this feature will need to amend their FSA plan before the end of their plan year.
Although the amendment can have a retroactive effect back to the beginning of the plan year, the maximum contribution increase only applies to the 2021 tax year, not the employer’s plan year. For organizations whose plan year began after January 1st, participants can only contribute the higher amount through the end of 2021. After that time, their contributions mustn’t exceed the standard $5,000 per year IRS limit. For example, if an employer’s plan year runs from July 1, 2021 to June 30, 2022, participants would only contribute the higher amount (up to $875 per month) through December 31, 2021. They would then contribute the standard amount (up to $416.67 per month) for the remainder of the plan year.
Important Considerations
Increasing the maximum dependent care FSA contribution isn’t a viable option for every company. Before implementing this change, employers need to determine whether it makes sense for their business.
Employers should consider whether their payroll system can support changing FSA contribution amounts. It’s also important that employers look into how this change might affect their plan’s compliance. For many companies, only highly compensated employees will be able to increase their contributions. This goes against the Internal Revenue Code (IRC), which allows pretax contributions to FSAs as long as they do not favor highly compensated employees (HCEs).
Employers considering implementing this change should speak with an experienced benefits broker. It’s also important that employers communicate changes to eligible participants. Please contact us for more information.
