Reviewing the Available Employee Relief Options and Weighing the Administrative Implications Before Adopting
Compliance Connections

From fostering a workplace culture centered on supporting the physical, emotional, career and financial wellbeing of employees to ensuring that benefit programs are compliant with local, state and federal requirements, effectively protecting the wellbeing of your employees connects directly to protecting the wellbeing of your organization overall. Compliance Connections delivers monthly, actionable guidance designed to help you manage and optimize the connections between the compliance of your benefits and human resources programs to overall organizational wellbeing. It is no understatement to say that over the past year, the COVID-19 pandemic has affected employers and employees in unprecedented ways and created unanticipated needs for plan participants. In an effort to address some of these needs during the ongoing pandemic, Congress and the federal agencies have temporarily relaxed many of the rules that typically govern health and welfare plan operation. Here we describe some of the optional relief available for cafeteria plans in 2021 that will allow for increased flexibility for plan participants. These changes, though a clear benefit for plan participants, may amplify the administrative burden on plan sponsors. Understanding the available relief, the benefits to participants, and any administrative implications is crucial in making a decision about whether to adopt the relief. Below, we share action items for employers contemplating adoption of available relief.

Consider allowing FSA election changes without a qualifying status change. Under the general cafeteria plan rules, participant elections are irrevocable during a plan year except on the occurrence of specified, permitted events. For example, the cafeteria plan rules allow a participant to increase a health flexible spending account (FSA) election upon the birth of a child or increase a dependent care FSA (DCAP) election to accommodate an increase in child care expenses, but do not allow a change simply due to a desire to increase or decrease a salary reduction amount. Because of the perceived need for increased flexibility during the COVID-19 pandemic, Congress passed the Consolidated Appropriations Act (CAA) to, among other things, allow participants to make changes to their health FSA and DCAP elections even absent permissible election change events. Specifically, the CAA allows participants, during a plan year ending in 2021, to make prospective changes in health FSA and DCAP salary reduction amounts, so long as the change does not exceed any applicable dollar amount limitations. For example, an employee could change a DCAP election in June 2021 even without a significant change in the cost of coverage, but the employee could not exceed the election amount permitted under the employer's DCAP. Employers have the discretion to determine whether to allow this change for 2021. What do you need to consider in deciding whether to permit FSA election changes without qualifying status changes for your plan year ending in 2021?

Take a look at the availability of additional health coverage election changes. In addition to the permitted FSA election changes under the CAA, Notice 2021-15 adds further flexibility by allowing certain health coverage election changes for plan years ending in 2021. Under this Notice, an employee may: (a) make a new election on a prospective basis if the employee initially declined to elect employer-sponsored health coverage (e.g., medical, dental, or vision coverage); (b) revoke an existing election and make a new election to enroll in different health coverage sponsored by the same employer on a prospective basis; or (c) revoke an existing election 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. With respect to a revocation of coverage, the Notice states that an employer may rely on the written attestation provided by the employee, unless the employer has actual knowledge that the employee is not, or will not be, enrolled in other comprehensive health coverage. These permitted changes are limited to health coverage (including dental, vision and health FSA coverage). As with the permitted changes under the CAA, these are discretionary. Which, if any, of these optional changes will you allow for 2021?

Investigate whether an increased DCAP limit would benefit your employees. With the temporary closure of schools and other circumstances impacting childcare during the pandemic, some families may have experienced increased child care needs and expenses. To assist with this need, the American Rescue Plan Act of 2021 (ARPA) temporarily increases the dependent care FSA (DCAP) limit from $5,000 to $10,500 for tax years beginning after December 31, 2020, and before January 1, 2022. Employers who would like to allow employees the opportunity to take advantage of the increased limit must amend their plans and, obviously, must communicate the change to employees. With that in mind, a plan may be retroactively amended to include this increase as long as: (1) the plan otherwise satisfies all applicable requirements of Internal Revenue Code Sections 125 and 129, (2) the amendment is adopted no later than the last day of the plan year in which the amendment is effective, and (3) the plan is operated consistent with the terms of such amendment during the period beginning on the effective date of the amendment and ending on the date the amendment is adopted. (For example, if a calendar year plan is amended to allow the increased limit on June 1, 2021, the amendment is formally adopted by December 31, 2021, the amendment can be applied retroactively to January 1, 2021 so long as the plan is operated consistently with the relief between June 1 and December 31.) What do you need to do to be prepared to offer the increased DCAP limit to employees?

Become familiar with the relief allowing unlimited health FSA or DCAP carryovers and consider whether a carryover would serve your organization well. As a general rule, health FSA and DCAP contributions are subject to the use-or-lose rule. That is, contributions generally cannot be carried over from one plan year to the next and unused amounts are forfeited. By way of exception, IRS rules permit health FSA participants to carry over a limited amount ($550 in 2021, indexed in future years), but no carry-over is allowed for DCAPs. However, to provide increased flexibility during the pandemic, the CAA temporarily allows unlimited carryovers for health FSAs and DCAPs from plan years ending in 2021 to plan years ending in 2022. This is a discretionary change and may be allowed for health FSAs, DCAPs, or both. Further, an employer choosing to allow a carryover may limit the carryover to a specified dollar amount and may provide that the carryover is permitted only up to a specified date during the plan year. Note that employers allowing an unlimited carryover cannot also provide the 12-month grace period, discussed below. What administrative and other issues should you consider in deciding whether to allow an unlimited carryover?

Examine the benefit of temporarily extending the health FSA or DCAP grace period. As an alternative to an unlimited carryover, plans may allow an extended grace period for health FSAs or DCAPs. Specifically, the CAA permits amounts remaining in a health FSA or DCAP at the end of a plan year ending in 2021 to be used up to 12 months after the end of the plan year. This is a temporary relaxation of the normal grace period rules, which allow amounts remaining in an FSA to be used up to two and a half months after the end of a plan year. As with the carryover relief, this is a discretionary change, and plans that choose to offer it are not required to allow the full 12-month grace period, but could choose a shorter period. Also keep in mind that plans opting to offer the extended grace period cannot allow a grace period in addition to 12-month carryover. What percentage of your plan participants would benefit from an extended grace period? Would they benefit more from a grace period than from a carryover?

This is a preview edition of Compliance Connections, a monthly publication produced by Gallagher's Compliance Consulting Practice. For five more action steps, contact your Gallagher representative or visit our Compliance Resources page to subscribe and receive the full version of this publication each month.


Compliance is a series of actions, not a final destination. As a trusted advisor, Gallagher has developed this Compliance Connections series to help you pursue a path through employee benefits compliance issues as part of an overall continuing compliance plan. Plan sponsors should carefully evaluate their health and welfare plans to determine if they are in compliance with both federal and state law. If you have any questions about one or more of the compliance requirements listed above, or would like additional information on how Gallagher constantly monitors laws and regulations impacting employee benefits in order to support plan sponsors in their compliance efforts, please contact your Gallagher representative.


The intent of this analysis is to provide you with general information. It does not necessarily fully address all your organization's specific issues. It should not be construed as, nor is it intended to provide, legal advice. Questions regarding specific issues should be addressed by your organization's general counsel or an attorney who specializes in this practice area.