2021 Fringe Benefit Changes: Student Loan Reimbursement and Flexible Spending Accounts

calendar iconJanuary 8, 2021

The Consolidated Appropriations Act, 2021 (the Act) extends through 2025 the provision in the Coronavirus Aid, Relief and Economic Security (CARES) Act that allows employers to reimburse employees tax-free for student loan repayments of up to $5,250. Previously, this provision expired at the end of 2020. To date, many employers did not reimburse employees for these amounts because the rules under the CARES Act specifically prohibited the use of salary reduction to fund the reimbursements and employers did not want to effectively increase an employee’s wages. This more permanent, tax-free opportunity may encourage employers to adjust future salary levels and provide this benefit as a way of attracting and retaining workers.

Several revisions affect health and dependent care flexible spending accounts (FSAs), generally making them easier to operate in the COVID environment. For the FSA plan year ending in 2021, employees can elect changes as needed without having a qualifying event. In addition, the FSA’s grace period for 2020 and 2021 can be extended from 2 ½ months to 12 months and unused funds can be carried over to the following calendar year for 2020 and 2021. Terminated employees participating in a health FSA can continue to receive tax-free reimbursements through the end of the FSA year in which they are terminated. Dependent care assistance programs only apply to children under age 13. If a child was enrolled before January 1, 2020, reimbursement of expenses can occur through the end of the FSA year in which the child attains age 13 or up until the child reaches age 14.

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