On December 27, 2020, President Trump signed into law an additional COVID-19 relief bill, attached to the Consolidated Appropriations Act of 2021, and intended to provide economic assistance to Americans impacted by COVID-19, as well as continued funding for the federal government. However, it also contains a surprising number of provisions relating to employee benefits which are summarized in this advisory.

FSA and Dependent Care Account Relief


The general rule is that Flexible Spending Accounts (FSA) and Dependent Care Accounts elections are irrevocable for the Plan Year, generally the calendar year. The general rule is that unused amounts in the FSA and Dependent Care Accounts are forfeited at the end of the year, subject to three exceptions:

  • 1. Run-Out Rule - Expenses incurred during the Plan Year may be reimbursed up to 2.5 months following the close of the Plan Year.
  • 2. Carry-Over Rule - An FSA account may permit up to $550 to be carried over to the next Plan Year. Dependent Care Accounts cannot use this carry-over provision.
  • 3. Grace Period Rule - The plan can permit expenses incurred within the first 2.5 months of the following plan year to be utilized against the prior year's outstanding account balance.

A plan can use either the Carry-Over Rule or the Grace Period Rule but cannot use both with respect to the same account. A plan can use the Run-Out Rule in addition to either the Carry-Over Rule and/or the Grace Period Rule.

COVID Relief

The newly passed relief bill contains a number of changes to these rules. All the changes are optional, so they will require amendments to your cafeteria plan that contain these benefits.

  • 1. Extended Carry-Over Rule and Extended Carry-Over Balance

    The entire unused balance in either a Dependent Care Account or FSA account may be carried forward into 2021 and 2022. Any balance at the end of 2020 can be carried forward into 2021, and any balance at the end of 2021 can be carried forward into 2022.

  • 2. Grace Period Extension

    The grace period of 2.5 months following the end of the plan year is extended to 12 months following the end of the plan year. For example:

    • The grace period ending in 2021 (March 15, 2021, for calendar year plans) can be extended to December 31, 2021.
    • The grace period ending in 2022 (March 15, 2022, for calendar year plans) can be extended until December 31, 2022.

    This rule applies to both FSA and Dependent Care Account elections.
  • 3. Elections Are Not Irrevocable for 2021

    Prospective changes are permitted to FSA and Dependent Care Account elections in 2021. The FSA and Dependent Care Account elections no longer need to be irrevocable during the 2021 plan year. The elections can be changed prospectively, for any reason, during 2021.

  • 4. Spend Down Provision

    Terminated participants, including participants who stop contributing in 2020 or 2021 can access their accounts. Terminated participants can access their account balances through the end of the plan year in which their participation terminates, plus any grace period. Therefore a participant terminated in 2020 could access their account through December 31, 2021, without the need to elect COBRA to access their account, if the plan adopted the extended grace period.

    A participant terminated in 2021 could access their account through December 31, 2022, without electing COBRA, if the plan adopted the extended grace period. Therefore, plans adopting this rule will also want to modify their COBRA notice.

    While the provision is specifically applicable to FSA accounts, the provision indicates that a Dependent Care Account could adopt similar rules utilizing existing regulations.

  • 5. Age to Access Dependent Care Account Is Extended

    Employment related expenses for child care services outside the employee's household are reimbursable if the care provided is for a child under the age of 13. If the maximum age of 13 is reached during a year in which the regular enrollment was on or before January 31, 2020, i.e., the 2020 calendar year for most employers, the plan can substitute age 14 for age 13 and utilize any unused account balance that is being carried forward into 2021.

  • 6. Deadline to Amend Plans

    The legislation permits retroactive amendments. The Plan must be amended by the last date of the calendar year following the close of the plan year for which the change is effective.

    For 2020 changes to a calendar year plan, the amendment must be adopted by December 31, 2021. For 2021 changes to a calendar year plan, the amendment must be adopted by December 31, 2022.

    In the interim, the Plan must operate in a manner consistent with the amendment.

  • 7. Carry-Over and Grace Period and HDHP

    FSA, Carry-Over, and Grace Period provisions should be designed to become limited purpose FSAs to preserve HSA (Health Spending Account) eligibility should the employee become enrolled in in HDHP (High Deductible Health Plan).

  • 8. Implementation

    Before implementing any of these rules work closely with your third party administrator and legal counsel to ensure consistency in communications and reimbursement.

Partial Termination


Under current law, a 20 percent reduction in the number of plan participants during the plan year raises the issue of the partial termination of the qualified plan. Upon a partial termination, the affected participants become 100 percent vested in their account balances under the plan.

COVID Relief

A plan will not be treated as having a partial termination if the number of plan participants as of March 31, 2021, is at least 80 percent of the active participants as of March 31, 2020. This provision gives the employer additional time to reach a participant count that would avoid a partial termination.

In addition, instead of measuring the partial termination on the plan year basis, the measurement period is March 31, 2020 (the beginning of the declaration of a National Emergency related to COVID-19) to March 31, 2021.

Coronavirus-Related Distributions (CRDs) From Money Purchase Pension Plans


Under the Coronavirus Aid, Relief and Economic Security (CARES) Act, qualified individuals are permitted to take penalty-free distributions of up to $100,000 from certain types of retirement plans and IRAs in 2020. Those plans could allow a CRD even if there was no other permissible distribution event (such as termination from employment).

Taxation of a CRD can be spread over three years and the CRD can be repaid within three years and treated like a rollover into the plan. The IRS previously indicated a money purchase pension plan would not be permitted to make a distribution prior to a permissible distribution event merely because the distribution, if made, would qualify as a CRD.

COVID Relief

The new relief bill provides that a money purchase pension plan is allowed to make an in-service distribution (i.e., one prior to a permissible distribution event) that qualifies as a CRD, and the provision is retroactive to January 1, 2020.

Qualified Disaster Distributions


Under previously enacted disaster relief, retirement plan participants and IRA owners were allowed to take a penalty-free distribution of up to $100,000 from the plan/IRA if they suffered economic loss while living in certain federally declared disaster areas in years prior to 2020.

Taxation of that distribution could be spread over three years and the distribution could be repaid within three years. Those individuals were also eligible to take a plan loan of up to the lesser of $100,000 or 100 percent of their vested account balance and could extend the loan repayment period for a year.

COVID Relief

The new relief bill extends these expanded distribution and loan opportunities for federally declared disasters (other than disasters due to COVID-19) declared from January 1, 2020 through 60 days after the relief was enacted, and applies to distributions and loans taken through 180 days after enactment. The ability to extend the loan repayment period for a year applies to repayments due between the first day of the disaster incident period and ending 180 days after the last day of such period.

In addition, participants who took a distribution from a plan for the purchase or construction of a principal residence but who couldn't use the distribution for that purpose due to the disaster, can repay the distribution to the plan within 180 days after enactment.

Employer - Paid Student Loan Repayments


Under the CARES Act, employers can pay up to $5,250 toward an employee's qualified education loan before January 1, 2021, on a tax-free basis. The $5,250 dollar limit applies to the loan repayments as well as other educational assistance provided to the employee.

COVID Relief

The relief bill retains the existing annual dollar limit on this nontaxable benefit but extends the sunset for such tax-free benefit to employer-paid loan payments made before January 1, 2026.

Surprise Medical Billing


Patients who are treated at an out-of-network facility (due to an emergency) or who are treated by an out-of-network provider at an in-network facility are often surprised to receive a large medical bill from the out-of-network facility/provider. The surprise occurs because the patient likely did not expect to receive out-of-network care for which the patient's health plan didn't have a negotiated contract, meaning that the patient is directly billed higher charges that must be paid out-of-pocket.

COVID Relief

The provisions of the relief bill with respect to surprise medical billing are effective January 1, 2022. The relief bill requires group health plans (both insured and self-insured) and issuers of group and individual health insurance to cover certain emergency services without requiring prior authorization and with in-network cost-sharing.

The Act also provides that, in the context of non-emergency services from out-of-network providers at an in-network facility and out-of-network air ambulance services, in-network rules for prior authorization and in-network pricing and cost-sharing apply. A patient cannot be balance billed the difference between the out-of-network reimbursement amount and the in-network reimbursement amount for emergency or air ambulance services.

In the emergency services, out-of-network providers at an in-network facility and out-of-network air ambulance situations, the plan or issuer must make an initial payment to the provider (or furnish a payment denial notice) within 30 calendar days of receipt of the provider's bill.

If the plan/issuer and the provider cannot agree on the payment amount, they must negotiate for at least 30 days. If the negotiation is unsuccessful, the dispute goes to arbitration where the arbitrator must choose either the plan/issuer's payment amount or the provider's requested payment amount, not an amount in-between the two. The party losing at arbitration must pay the costs of arbitration.

Mental Health Parity


The Mental Health Parity and Addiction Equity Act of 1996 prohibits a group health plan that provides mental health or substance use disorder benefits from imposing less favorable benefit limitations on those benefits than on medical/surgical benefits provided under the plan. One type of such limitation is a nonquantitative treatment limitation (a NQTL) such as a preauthorization requirement.

A NQTL cannot be imposed with respect to mental health or substance use disorder benefits unless, under the terms of the written plan/coverage and in operation, any processes, strategies, evidentiary standards, or other factors used in applying the NQTL to mental health and substance use disorder benefits are comparable to, and are not applied more stringently than, the processes used in applying the limitation with respect to medical/surgical benefits.

COVID Relief

Within 45 days after the enactment of the relief bill, health plans will be required to perform and document a formal comparative analysis of the design and application of any NQTL applicable to mental health or substance use disorder benefits.

Such analysis and related information utilized to design and apply the NQTL must be made available, if requested, to the appropriate state authority or the secretaries of the U.S. Departments of Health and Human Services or Labor. The relief bill provides that the secretaries are to request analyses from at least 20 group health plans each year.

If it is determined, after reviewing the comparative analysis, that the NQTL does not comply with parity requirements, the plan must take corrective action.

Deduction of Business Meals 


Under section 274(n) of the Internal Revenue Code, the deduction for business meals was generally limited to 50 percent of the otherwise allowable amount.

COVID Relief

During 2021 and 2022, business meals at restaurants are fully deductible. While the provision has been criticized as the return of the "three martini lunch," the provision is aimed at restoring the restaurant industry.

In conclusion, the new relief bill seems to contain some type of benefits relief for everyone, a holiday gift to make everyone's year-end and new year a bit happier and brighter.

The facts, laws, and regulations regarding COVID-19 are developing rapidly. Since the date of publication, there may be new or additional information not referenced in this advisory. Please consult with your legal counsel for guidance.

DWT will continue to provide up-to-date insights and virtual events regarding COVID-19 concerns. Our most recent insights, as well as information about recorded and upcoming virtual events, are available at www.dwt.com/COVID-19.