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IRS Clarifies Taxability of Dependent Care Benefits Provided Pursuant to a Carryover or Extended Grace Period

The IRS recently issued Notice 2021-26 (the ?Ç£Notice?Ç¥), which addresses certain questions that were not specifically answered in the Taxpayer Certainty and Disaster Tax Relief Act of 2020 (enacted as part of the Consolidated Appropriations Act, 2021), and subsequent IRS guidance (collectively, the ?Ç£CAA Guidance?Ç¥). The CAA Guidance addressed the taxability of dependent care benefits provided under a dependent care assistance program (?Ç£DCAP?Ç¥) when a carryover or extended grace period is applied.?á As discussed in our prior blog post here, the CAA Guidance permits employers to adopt (i) a carryover of unused DCAP funds from taxable years 2020 to 2021 and 2021 to 2022 (?Ç£CAA Carryover?Ç¥) or (ii) an extended grace period for incurring DCAP claims for plan years ending in 2020 and 2021 (?Ç£CAA Extended Grace Period?Ç¥). The CAA Guidance confirms that any unused DCAP amounts carried over from one year (?Ç£Prior Year?Ç¥) to, or available in, the subsequent… Continue Reading

Big Increase in Dependent Care Flexible Spending Account Limit for 2021

The American Rescue Plan Act of 2021 (?Ç£ARPA?Ç¥), which was enacted on March 11, 2021, temporarily increases the maximum amount that an employee is permitted to contribute to a dependent care flexible spending account (?Ç£FSA?Ç¥) from $5,000 to $10,500 (or from $2,500 to $5,250 for a married person filing a separate return) for the taxable year beginning in 2021. The increased dependent care FSA limit is an optional change that a plan sponsor may choose to incorporate into its dependent care program included under its cafeteria plan. This change, combined with the change under the Consolidated Appropriations Act, 2021 (?Ç£CAA?Ç¥), which authorizes a cafeteria plan to permit participants to make prospective changes to their dependent care FSA contributions (see our prior blog post regarding the CAA here), allows participants to increase contributions to their dependent care FSAs in 2021. In order to implement the new dependent care FSA limit, the… Continue Reading

The Consolidated Appropriations Act of 2021 and Benefits Changes Employers Need to Focus on Right Now

Retirement Plans Additional Relief May Help Prevent Partial Plan Terminations The recently adopted Consolidated Appropriations Act of 2021 (the ?Ç£CAA?Ç¥) provides relief for qualified retirement plans of employers that had to reduce their workforce as a result of the pandemic (through furloughs, layoffs, or terminations) for plan years that include the period beginning on March 13, 2020 and ending on March 31, 2021. Specifically, these plans shall not be treated as incurring a partial plan termination if the number of active participants covered by the plan on March 31, 2021 is at least 80% of the number of active participants that were covered by the plan on March 13, 2020. A partial plan termination generally occurs when more than 20% of a plan?ÇÖs participants are terminated in a plan year. If a partial plan termination occurs, then the plan is required to 100% vest any ?Ç£affected employees?Ç¥. ?Ç£Affected employees?Ç¥ are… Continue Reading

Payments for Certain Healthcare Arrangements are Tax Deductible

The IRS recently issued proposed regulations that?áaddress the treatment of amounts paid by an individual for a ?Ç£direct primary care arrangement?Ç¥ or a ?Ç£health care sharing ministry?Ç¥ (collectively, the ?Ç£Arrangements?Ç¥) as being tax-deductible ?Ç£medical care expenses?Ç¥ under Section 213 of the Internal Revenue Code (the ?Ç£Code?Ç¥). Under the proposed regulations, a direct primary care arrangement (?Ç£DPC Arrangement?Ç¥) is defined as a contract between the individual and one or more primary care physicians pursuant to which the physician(s) agree to provide medical care for a fixed annual or periodic fee without billing a third party. A health care sharing ministry (?Ç£Sharing Ministry?Ç¥) is defined as a tax-exempt organization under Section 501(c)(3) of the Code that meets specified requirements, including that its members share a common set of ethical or religious beliefs and share medical expenses in accordance with those beliefs. HSAs and the Arrangements. The preamble to the proposed regulations confirms… Continue Reading

COVID-19 Relief ?Çô Added Flexibility to Code Section 125 Cafeteria Plans

Prospective Mid-Year Election Changes IRS Notice 2020-29 allows employers to amend cafeteria plans to permit employees to make the following prospective mid-year election changes (including an initial election) for employer-sponsored health coverage, health flexible spending accounts (?Ç£FSAs?Ç¥), and dependent care FSAs during calendar year 2020, regardless of whether the basis for the election change satisfies the ?Ç£change in status?Ç¥ rules under Treas. Reg. ?º 1.125-4: Make a new election for employer-sponsored health coverage, if the employee initially declined to elect employer-sponsored health coverage; Revoke an existing election for employer-sponsored health coverage and make a new election to enroll in different health coverage sponsored by the same employer (including changing enrollment from self-only to family coverage); Revoke an existing election for employer-sponsored health coverage, provided the employee attests in writing that the employee is enrolled, or immediately will enroll, in other health coverage not sponsored by the employer; and Revoke an… Continue Reading

CARES Act: Calculating Qualified Health Plan Expenses for Purposes of the Employee Retention Credit

Under the CARES Act, employers are eligible to claim an employee retention credit if certain conditions are met (see our prior blog post on the employee retention credit, as well as other employee benefits and executive compensation changes made by the CARES Act, here). The tax credit is equal to 50% of ?Ç£qualified wages?Ç¥ paid to employees of up to $10,000. Qualified wages include (i) wages actually paid to covered employees (other than qualified paid sick and family leave wages for which a credit is allowed under the Families First Coronavirus Response Act) and (ii) the ?Ç£qualified health plan expenses?Ç¥ allocable to such employees. On May 11, 2020, the IRS published new FAQs clarifying how qualified health plan expenses should be calculated for purposes of the employee retention credit. Notably, the FAQs provide guidance on how to calculate such expenses when an employer sponsors more than one health plan (e.g.,… Continue Reading

COVID-19 Relief ?Çô Added Flexibility to 125 Cafeteria Plans

Prospective Mid-Year Election Changes IRS Notice 2020-29 allows employers to amend cafeteria plans to permit employees to make the following prospective mid-year election changes (including an initial election) for employer-sponsored health coverage, health flexible spending accounts (?Ç£FSAs?Ç¥), and dependent care FSAs during calendar year 2020, regardless of whether the basis for the election change satisfies the ?Ç£change in status?Ç¥ rules under Treas. Reg.  ?º1.125-4: Make a new election for employer-sponsored health coverage, if the employee initially declined to elect employer-sponsored health coverage; Revoke an existing election for employer-sponsored health coverage and make a new election to enroll in different health coverage sponsored by the same employer (including changing enrollment from self-only coverage to family coverage); Revoke an existing election for employer-sponsored health coverage, 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; Revoke an… Continue Reading

Health Care FSA Contribution Limit Increased for 2017

On Friday, October 25, the IRS released Revenue Procedure 2016-55, which increases the maximum amount an employee may contribute toward a health care flexible spending account through salary reduction to $2,600 for 2017. Rev. Proc. 2016-55 is available here.

Revised Data Security Standards for Payment Cards

The Payment Card Industry Security Standards Council recently released revised data security standards for payment cards, which include debit cards issued by vendors in conjunction with flexible spending accounts, health reimbursement arrangements, and health savings accounts. These revised standards update the Payment Card Industry Data Security Standard (?Ç£PCI DSS?Ç¥) to version 3.2 and contain a variety of enhancements to protect against security threats, including revised system penetration testing requirements, enhanced policies and procedures for detecting failures, and stricter authentication protocols. The PCI DSS responsibilities fall on the card issuers, vendor service providers, merchants, etc., not on an employer which merely sponsors or facilitates a spending account benefit that utilizes debit cards. PCI DSS version 3.2 will be viewed as a ?Ç£best practice?Ç¥ until January 31, 2018. Beginning February 1, 2018, version 3.2?ÇÖs standards become mandatory for the industry. Employers sponsoring or facilitating spending account benefits utilizing debit cards should update… Continue Reading

IRS Issues Guidance Regarding Improper Payments from Health FSAs

On March 28, the Internal Revenue Service (the ?Ç£IRS?Ç¥) released a Memorandum from the Office of the Chief Counsel of the IRS which addressed several issues regarding correction procedures to follow in the event that improper payments are made from an employee?ÇÖs health flexible spending account arrangement (?Ç£HFSA?Ç¥).?á The following guidance was provided: (1) the correction procedures for debit cards in the proposed cafeteria plan regulations may be used to correct improper payments from HFSAs; (2) an employer may apply the correction procedures in those proposed regulations in any order, except that the employer may only forgive an improper payment from an HFSA as an uncollectible business debt after all other permissible correction methods have been attempted; and (3) if an employer does forgive an improper HFSA payment as an uncollectible business debt, the amount forgiven is to be reported as wages on Form W-2 and is subject to withholding… Continue Reading

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