How does the American Rescue Plan Act affect employees with dependent care flexible spending accounts (DC-FSAs)? This relief bill signed into law in mid-March, 2021, raises the limits for pre-tax contributions, and increases the value of the dependent care tax credit for 2021. It also contains significant impacts to COBRA coverage, with a new premium subsidy that extends throughout 2021. How will these temporary laws affect your business? We’ve got details – let’s dive in.
New DC-FSA Contribution Limits
First, a quick reminder on DC-FSA usage and eligibility. Dependent care FSAs are pretax benefit accounts, which employees can fund and then use for the supervision or care of their dependents. This can include preschool, summer camp, school pre and aftercare, and daycares for both children and adults. Dependents must be under the age of 13, or incapable of their own care, and must live with the FSA holder for more than half of the year—although for elder care, the adult should live with the FSA holder at least eight hours per day, and must be claimed as a dependent by the FSA holder.
In order to give parents and caregivers more flexibility with the use of their DC-FSA money, the current plan year (2021) now has higher annual limits for pre-tax contributions. Single taxpayers, and married couples filing jointly, can now contribute up to $10,500, and married couples filing separately can contribute up to $5250 each. This is more than double the usual limits, of $5,000 and $2500, respectively.
And don’t forget that previous relief acts also extended some changes to the FSA landscape. The Consolidated Appropriations Act allowed employers to permit plan participants to roll over their unused Health and Dependent Care FSA funds from 2020 to 2021, and from 2021 to 2022. Additionally, leftover DC-FSA funds from 2020 can be spent on children who turned 13 during the declared public health emergency for Covid-19. In a normal year, these children would have aged out of the program.
COBRA Subsidy Changes
With record numbers of Americans losing health insurance due to lay-offs and furloughs during the pandemic, the bill aimed to keep former employees covered with a 100% premium subsidy, to be payed by employers. By introducing a premium subsidy period, employers offering group health plans may be required to pay for applicable COBRA premiums for eligible individuals.
When: This premium subsidy period begins April 1, 2021 and ends September 30, 2021. Payments for this subsidy run for this period only, not the applicable COBRA period of each individual — it does not provide extensions for COBRA periods.
What Plans are Included: Group health plans which are subject to the Employee Retirement Income Security Act, Internal Revenue Code, or the Public Health Service Act. Plans not subject to the above laws, but subject to state law, such as New York’s mini-COBRA, are also included.
Who’s Eligible: Any employee who becomes eligible for COBRA due to an involuntary termination of employment, or a reduction in hours, during the premium subsidy period. During this special election period, election by newly-eligible individuals as well as individuals who previously declined COBRA, or discontinued COBRA coverage, are able to select COBRA and receive the premium subsidy. This subsidy provides a “second chance” to elect COBRA coverage for those eligible in this period.
Who’s Not Eligible: Individuals who are eligible for COBRA through a voluntary termination of employment, or employees terminated for gross misconduct, or any other qualifying event other than involuntary termination of employment or reduction in hours.
Additionally, the premium subsidy would end beginning on or after the first date that an individual becomes eligible for coverage under another group health plan or Medicare, with some exceptions such as a qualified small employer health plan.
What Notices Are Required: Written notification is required for individuals who become eligible to elect COBRA in the premium subsidy period, to those who elected COBRA before April 1, 2021, and to those who did not elect or discontinued coverage before April 1, 2021. This notice must be provided within 60 days of April 1, 2021.
Notice of premium subsidies ending must go out between 45 and 15 days before the premium subsidy’s end date.
Go deeper: SHRM has a deep dive into the COBRA premium subsidy update at their site.
Communicate COBRA and Other Changes
Keep your employees notified on these changes! If your Human Resources communications could use a boost, talk to the experts at WBD. Click here to contact us and learn how our built-in communication tools can save your team time and money — and keep your employees on top of their benefits.