Skip to content

IRS Clarifies, Expands on COVID-Related Cafeteria Plan Relief and CARES Act Changes



IRS Notice 2021-15 (Feb. 18, 2021)

Available at

The IRS has issued a notice clarifying the temporary relief for health FSAs and DCAPs (collectively, FSAs) that was enacted as part of the Consolidated Appropriations Act, 2021 (CAA, 2021) (see our Checkpoint article). The notice also allows additional election changes and provides relief regarding the effective date of amendments implementing the CARES Act’s provisions allowing reimbursement of over-the-counter (OTC) drugs without prescriptions and menstrual care products (see our Checkpoint article). Here are highlights:

  • Carryover Relief. Cafeteria plans may allow a carryover to the next plan year of all or part of the unused amounts remaining in a health FSA or DCAP as of the end of a plan year ending in 2020 or 2021. Employees may be required to enroll in the FSA with at least a minimum election amount to have access to unused amounts from the previous plan year. Employers may also limit carryover amounts or the period during which carryovers can be used.
  • Grace Period Relief. Alternatively, cafeteria plans can allow FSA amounts remaining at the end of a plan year ending in 2020 or 2021 to be used to reimburse expenses incurred for the same benefit (medical care or dependent care, as applicable) for up to 12 months after the end of the plan year. Unused amounts from one plan year that remain available at the end of a 12-month grace period (i.e., at the end of the next plan year) need not be forfeited and may be made available in the next grace period. The notice explains how the grace period relief may vary from the carryover relief (for example, the two forms of relief may apply differently to employees whose participation ceased in an earlier plan year).
  • Carryovers and Grace Period General Rules. The carryover and grace period relief are available to cafeteria plans that currently have a grace period or allow carryovers and those that do not. Employers may adopt the relief for only some participants (subject to the Code’s nondiscrimination rules) but may not adopt both forms of relief for the same FSA for a particular plan year. Amounts carried over or available for use during an extended grace period are not considered when determining whether a health FSA meets the maximum benefit condition of the excepted benefit rules or in the following year’s nondiscrimination testing (under Code § 125 or 129), and do not count toward the following year’s annual limit for contributions under the Code. Current Form W-2 DCAP reporting rules (under which employers are not required to adjust Box 10 for amounts that remain available in a grace period) continue to apply to carryovers or an extended grace period under the relief. Regular rules for carryovers and grace periods will apply for plan years ending in or after 2022. Examples illustrate how the relief applies and how plans will transition back to the regular rules.
  • Health FSA Spend-Downs. Health FSAs may allow employees who ceased participation during the 2020 or 2021 calendar year (whether due to termination of employment, change in employment status, or a new election) to be reimbursed from unused benefits or contributions through the end of the plan year in which participation ceased, including any grace period (or a shorter period if elected by the employer). The notice confirms that employers may limit the unused amounts to the employee’s salary reductions through the date participation ceased and explains how the spend-down interacts with COBRA—for example, the spend-down will not prevent individuals from having a loss of coverage resulting in a COBRA qualifying event, in which case they must receive COBRA election notices.
  • DCAP Age Relief. DCAPs may extend the maximum age from 12 to 13 when reimbursing dependent care expenses during the last plan year with a regular enrollment period ending on or before Jan. 31, 2020, and may allow employees with unused balances for that plan year to apply this rule to claims for reimbursement of the unused balance in the following plan year. Employers can adopt this relief without adopting the carryover or grace period relief.
  • FSA Election Relief. For plan years ending in 2021, plans may allow employees to prospectively revoke, increase, decrease, or make a new FSA election midyear, regardless of whether the basis for the change meets IRS election change requirements. Amounts contributed to an FSA after a revised election can be used for eligible expenses incurred during the first plan year beginning on or after January 1, 2021, even if the employee was not enrolled in the FSA on January 1, 2021. The plan’s terms (which must apply uniformly to all participants) determine the treatment of unused contributions following a revocation—e.g., whether they are available to reimburse expenses incurred during the rest of the plan year or only before the revocation, or whether they are forfeited. If a health FSA provides that revocation of an election terminates participation and the right to receive reimbursements (regardless of when expenses were incurred), the health FSA will not be considered disqualifying coverage for HSA eligibility purposes and HSA contributions may commence after health FSA participation terminates (assuming that other HSA eligibility requirements are met). If expenses incurred before participation ends can be submitted, the health FSA will not be considered disqualifying coverage for months after the revocation date.
  • Additional Election Relief. Plans may allow the following prospective election changes involving employer-sponsored health, dental, or vision coverage (collectively, health coverage) for plan years ending in 2021, similar to relief previously provided for calendar year 2020 (see our Checkpoint article): (1) new elections for coverage by employees who initially declined coverage; (2) elections to enroll in different health coverage sponsored by the same employer (including a change from self-only to family coverage); and (3) revocation of existing elections, with a written attestation that the employee is or immediately will be enrolled in other health coverage not sponsored by the employer. The notice includes sample attestation language and states that employers may rely on employees’ attestations absent actual knowledge to the contrary. Employers utilizing the relief can determine the extent to which the additional election changes are permitted and can place certain other limits on these changes (e.g., to limit adverse selection) so long as amendments are nondiscriminatory.
  • HSA Issues. The notice confirms that the carryover relief, grace period relief, and health FSA spend-down are extensions of non-HDHP coverage that adversely affect eligibility for HSA contributions unless the health FSA is HSA-compatible, although plans can be amended to allow employees to opt out of a carryover or extended period for incurring claims in plan years ending in 2021 and 2022 to preserve HSA eligibility. Plans may also allow midyear election changes to switch between HSA-compatible and general-purpose health FSAs (or vice versa). While unused amounts from the old FSA may be added to the new one, each health FSA can reimburse only expenses allowed under that arrangement and incurred when it covered the employee; employees’ permissible HSA contributions are based on the number of months they are covered by an HDHP and an HSA-compatible health FSA (unless the full-contribution rule applies). If an employee with HDHP coverage switches midyear to non-HDHP coverage and adds a general-purpose health FSA that reimburses expenses incurred during the HDHP coverage period, the health FSA must be operated as an HSA-compatible arrangement for that period.
  • CAA, 2021 Amendments. Employers wishing to implement the CAA, 2021 relief must adopt an amendment by the end of the first calendar year beginning after the end of the plan year in which the amendment is effective, and must operate their plans in accordance with the amendment’s terms beginning on its effective date. Employers must also inform eligible employees of the changes. The deadline for adopting a carryover relief amendment is based on the end of the plan year from which the funds are carried over. The notice cautions that amendments may trigger requirements under other laws (e.g., ERISA’s notice requirements) and may be subject to the Code’s nondiscrimination rules for cafeteria plans and DCAPs.
  • CARES Act Amendments. Health FSAs and HRAs may be amended to provide for tax-favored reimbursement of expenses for OTC drugs without prescriptions and menstrual care products incurred on or after January 1, 2020, notwithstanding the general rule that reimbursements will not qualify for exclusion from income unless the plan covered the expense when it was incurred.

EBIA Comment: Employers and advisors who work with cafeteria and account-based plans will want to familiarize themselves with this guidance as they consider whether to take advantage of the available relief, keeping in mind that these provisions are discretionary and will require plan amendments. As with prior COVID-related relief, key cafeteria plan principles remain in place: retroactive election changes generally are not permitted, and unused contributions cannot be cashed out. For more information, see EBIA’s Cafeteria Plans manual at Sections XIV (“When May Participant Elections Be Changed?”), XVI.N (“Mandatory and Discretionary Claim-Related Extensions Due to COVID-19”), and XX (“What Expenses Can Be Reimbursed Under a Health FSA?”); and EBIA’s Consumer-Driven Health Care manual at Sections XI.D (“General-Purpose Health FSA or HRA Coverage Will Prevent HSA Eligibility”) and XXIV (“HRAs: Reimbursements”).

Contributing Editors: Thanks to attorney John R. Hickman for his contributions to this article, with final editing by EBIA staff. Mr. Hickman is a partner in the Employee Benefits Practice Group with Alston & Bird in Atlanta,, and is a Contributing Author of EBIA’s Cafeteria Plans, Consumer-Driven Health Care, and Health Care Reform manuals.

More answers