Substantial Changes for Consumer-Directed Health Care Accounts

There’s a saying about March—“It comes in like a lion and goes out like a lamb.”

We might submit that the whole month has been pretty “lion” for HR and benefits teams this year. The American Rescue Plan Act (ARPA) has created some exciting opportunities for individuals without health plan coverage to take advantage of a short-term 100% COBRA subsidy.

This is welcome news for the hundreds of thousands of workers who were involuntarily terminated or saw a reduction in hours event since October 2019. The need for health plan coverage is at an all-time high, as we’ve seen record enrollment for the special ACA enrollment period since it reopened on Feb. 15. HHS announced last week that the enrollment period for ACA will remain open through Aug. 15, 2021.

While we’ve all been focused on sorting through subsidy eligibility rules, model notices and the like, there have also been some key updates to consumer-directed healthcare (CDH) accounts.

1. Flexible Spending Account (FSA) Relief Options: In late December, the Consolidated Appropriations Act made numerous provisions for FSA grace period extensions and increased carry over amounts to help account holders who did not have the opportunity to exhaust the funds they’d set aside due to the pandemic. If an employer wants to adopt these measures for special enrollment periods or extensions, they will need to contact their TPA and make plan amendments to take advantage of these relief measures. We outlined many of the options in a blog post and followed up with a compliance webinar and some hearty Q & A.

2. Dependent Care FSA Amount Increase: ARPA provided a long-awaited boost to the dependent care FSA (DCFSA) maximum allowable contribution amount. This is the first increase in 35 years to the DCFSA allowed amount. For reference, the top TV shows the last time there was a change to DCFSAs were The Cosby Show and Family Ties, and Millennials were just being born. Clearly, it was time for an increase; the maximum of $5,000 in 1986 equates to about $11,998 in 2021.

ARPA increases the dependent care FSA limit for calendar year 2021 to $10,500 (up from $5,000) per family. As with the standard rules, the limit is reduced to half of that amount, or $5,250 (up from $2,500), for married individuals filing separately. At this time, the increased maximum contribution amount for DCFSAs is designated only for 2021; however, we think it would be hard for the IRS or Congress to reduce it thereafter, so the odds of that maximum amount remaining in place for some time might be high. That family maximum amount equates to about $220/week, which is more in line with current child care costs and may allow parents to set aside their tax-free dependent care funds and save in the long run. Again, this is an allowable amount, not a mandate; so, employers who want to take advantage of this provision would need to make a plan amendment and communicate the new maximum to their population.

3. Eligible Expense List Update: Masks?! There are more new eligible expenses to add to the list for FSAs, health savings accounts (HSAs) and medical health reimbursement accounts (HRAs). In 2020, we saw the addition of over-the-counter medications/treatments and feminine hygiene to the list of allowable items. On March 26, the IRS released Notice 21-07 that allows “amounts paid for personal protective equipment, such as masks, hand sanitizer and sanitizing wipes, for the primary purpose of preventing the spread of the Coronavirus Disease 2019” to be added to the IRC 213(d) eligible expenses list. Items already covered under a health plan cannot be reimbursed or covered with a CDH account. These items should be used by the account holder or their dependents. As with the over-the-counter treatments and feminine hygiene items, accounts holders may claim these expenses retroactively to Jan. 1, 2020, provided their plan allows reimbursement within that time frame.

All of these legislative items are steps in the right direction toward continuing to help employees build financial wellness through their tax-advantaged savings and spending accounts. The 2020 PwC Employee Financial Wellness Survey showed that more than a third of employees could not absorb a $1,000 emergency expense. That survey also revealed that about 20% of employees polled (across all generations) would consider using their retirement funds to pay medical bills. Deploying FSAs, HSAs or HRAs as part of your benefits strategy can be a big part of providing that financial safety net for health-related emergencies and unexpected health expenses.

Stay tuned to our blog and subscribe for additional news and HR updates about everything from culture to mental health to benefits and beyond. To learn more about increasing FSA enrollment, check out our e-book: To contribute or not to contribute: Getting employees to take advantage of healthcare FSAs.