HomeMy WebLinkAboutStaff Report 13733
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City of Palo Alto Page 1
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Staff recommends the City Council adopt a Resolution (attachment A) amending the City of Palo
Alto's employee Flexible Benefits Plan for Healthcare Flexible Spending Accounts and
Dependent Care Flexible Spending Accounts.
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A Flexible Spending Account allows employees to use pre-tax dollars to pay for eligible
expenses. Health Care Flex Spending Accounts can be used for out-of-pocket health related
expenses and Dependent Care Flex Spending Accounts can be used for out-of-pocket childcare
and elder care expenses. To participate, employees need to enroll each year, and can
contribute up to the annual IRS maximums.
In response to the Pandemic, the President signed the Consolidated Appropriations Act (CAA)
on December 27, 2020 which contained several Flexible Spending Account (FSA) related relief
provisions for participants. In addition, on March 11, 2021, the federal government passed and
signed into law the American Rescue Plan Act of 2021 (ARPA) in hopes to speed up the United
States' recovery from the economic and health effects of the COVID-19 pandemic and the
ongoing recession. While these relief provisions were optional, the City administratively
implemented those provisions that provided maximum relief to FSA plan participants.
Employers were given through the end of the plan year to finalize the administrative action as
required by IRS rules to amend their FSA plans. The recommended Resolution ratifies this
amendment.
The new provisions pertaining to the City of Palo Alto benefit plans are further explained below.
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The Consolidated Appropriations Act and ARPA increased flexibility for FSA participants during
the 2021 and 2022 calendar year. While many Americans continue to be affected by the
ongoing pandemic, the IRS also provided additional options to help FSA participants save
money and expand certain rules that allow more flexibility. As these provisions do not appear
extraordinary or controversial, staff recommends Council approval on consent.
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Make changes to FSA without a qualifying status event (getting married, birth of a child, etc.)
Employees were able to make a change in election amounts for plan years ending in 2021
without a change in status event. This meant they could change their FSA election amount or
sign up for an FSA outside of the open enrollment period.
Terminated employees can still access FSA funds
Prior to the passing of the 2021 stimulus bill, employees would have lost access to their unused
health FSA funds on the last day of employment. Employees are now able to claim their unused
funds in their health FSA even if their employment status changes in 2020 or 2021. They can
continue to spend money on eligible healthcare items and get reimbursed from their health FSA
up to the amount they contributed.
12 months to incur and claim expenses (extended grace period)
Employees have 12 months after the plan year ended to incur medical costs and submit claims
to their health FSA. This extension was valid for plan years ending in 2020 and 2021. This means
any medical expenses incurred in 2021 could be applied to their 2020 FSA, and expenses
incurred in 2022 can be applied to their 2021 FSA. It gives employees 12 months instead of the
usual 2.5 months grace period to incur expenses and claim their FSA dollars.
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Increase Dependent Care FSA contribution maximum amount to $10,500 for 2021.ARPA
temporarily increased the Dependent Care FSA contribution maximum amount that can be
excluded from income from $5,000 to $10,500 for the 2021 calendar year.
Make changes to FSA without a qualifying status event (getting married, birth of a child, etc.)
Employees were able to make a change in election amounts for plan years ending in 2021
without a change in status event. This meant they could change their FSA election amount or
sign up for an FSA outside of the open enrollment period.
12 months to incur and claim expenses (extended grace period)
Employees have 12 months after the plan year ended to incur medical costs and submit claims
to their health FSA. This extension was valid for plan years ending in 2020 and 2021. This means
any medical expenses incurred in 2021 could be applied to their 2020 FSA, and expenses
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incurred in 2022 can be applied to their 2021 FSA. It gives employees 12 months instead of the
usual 2.5 months grace period to incur expenses and claim their FSA dollars.
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Flexible Spending Accounts are funded through deductions from an employee’s paycheck.
These changes have no impact to the City’s budget.
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City employees were notified of these changes in an all-staff email sent in February 2021 and
April 2021. These notices included details about the changes and necessary forms needed to
enroll.
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Approval of this resolution does not constitute a project under the California Environmental
Quality Act (CEQA), therefore, an environmental assessment is not required.
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• ƚƚĂĐŚŵĞŶƚϵ͘Ă͗Attachment A: Flexible Spending Account (FSA) Plan Amendment
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Page 1 of 6 Attachment A
CITY OF PALO ALTO FLEXIBLE BENEFITS PLAN
AMENDMENT 1
ARTICLE I
PREAMBLE
1.1 Adoption and effective date of amendment. The Employer adopts this Amendment to the City of Palo
Alto’s Flexible Benefits Plan (the “Plan”). The sponsor intends this Amendment as good faith
compliance with the requirements of these provisions. This Amendment shall be effective on or after
the date the Employer elects in Section 2.1 below.
1.2 Supersession of inconsistent provisions. This Amendment shall supersede the provisions of the Plan
to the extent those provisions are inconsistent with the provisions of this Amendment.
1.3 Construction. Except as otherwise provided in this Amendment, any reference to "Section" in this
Amendment refers only to sections within this Amendment and is not a reference to the Plan. The
Article and Section numbering in this Amendment is solely for purposes of this Amendment, and does
not relate to any Plan article, section, or other numbering designations.
ARTICLE II
ELECTIONS
2.1 Effective Date. The provisions of this Amendment, unless otherwise indicated are effective as of
January 1, 2021 (the “Effective date”).
2.2 American Rescue Plan Act of 2021 Amendment. The Employer hereby amends the Dependent
Care Flexible Spending Plan within the 2021 calendar year as follows:
Increase in Exclusion for Employer Provide Dependent Care Assistance
Section 9632 of the American Rescue Plan Act (ARPA) amends Section 129(a)(2) of the internal
Revenue code of 1986. In the case of any taxable year beginning after December 31, 2020, and before
January 1, 2022.
The amount which may be excluded for dependent care assistance with respect to dependent care
services provided during a taxable year shall not exceed $10,500 ($5,250 in the case of a separate return
by a married individual).
2.3 H.R. 133 Consolidated Appropriations Act Amendment(s). The Employer hereby amends the Plan
as follows:
Post-Termination Reimbursements from Health FSAs
On December 27, 2020, H.R. 133 Consolidated Appropriations Act was signed into law, impacting
section 125 cafeteria plans. This guidance is designed to provide temporary flexibility for employers
and employees and assist with the National response to the 2019 Novel Coronavirus outbreak (COVID-
19).
Effective as of the effective date, the Employer amends their plan to allow for terminated participants to
continue to receive reimbursements from their Health FSA unused funds thru the end of the plan year
their participation ceased. This guidance only applies to the 2020 and 2021 plan year.
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Page 2 of 6 Attachment A
A plan that includes a health flexible spending arrangement shall not fail to be treated as a cafeteria plan
under the Internal Revenue Code of 1986 merely because such plan or arrangement allows (under rules
similar to the rules applicable to dependent care flexible spending arrangements) an employee who
ceases participation in the plan during calendar year 2020 or 2021 to continue to receive
reimbursements from unused benefits or contributions through the end of the plan year in which such
participation ceased (including any grace period).
The extension of the period for incurring claims under this guidance is an extension of coverage that is
not HSA compatible, consequently any terminated employee with unused amounts remaining after
termination, (including any grace period) will not be eligible to contribute to an HSA during the post-
termination coverage period.
Section 125 Change in Status under the Health or Dependent Care FSA
Effective as of the effective date, the Employer amends their plan to allow for the below change in
status flexibility. This is a temporary change effective only for the plan year ending in 2021.
On December 27, 2020, H.R. 133 Consolidated Appropriations Act was signed into law, impacting
section 125 cafeteria plans. This guidance is designed to provide temporary flexibility for employers
and employees and assist with the National response to the 2019 Novel Coronavirus outbreak (COVID-
19). These changes permit, under certain circumstances, prospective changes to health and dependent
care FSA elections as follows:
a) employees may revoke a health FSA election, make a new election, or decrease or increase an
existing election on a prospective basis; and
b) employees may revoke a dependent care FSA election, make a new election, or decrease or increase
an existing election on a prospective basis.
Employers are not required to allow unlimited election changes but may determine the extent to which
such changes are permitted and applied. Any change allowed shall not permit a revocation or decrease
in election below the amount already disbursed.
Extension of Grace Periods for Plan Years ending in 2020 and 2021
Effective as of the effective date, the Employer amends their plan to allow for the extension of the
Grace Period for plan year ending in 2020 and 2021 to 12 months after the end of such plan year.
In general a plan that includes a health flexible spending arrangement or dependent care flexible
spending arrangement shall not fail to be treated as a cafeteria plan under the Internal Revenue Code of
1986 merely because such plan or arrangement extends the grace period for a plan year ending in 2020
or 2021 to 12 months after the end of such plan year, with respect to unused benefits or contributions
remaining in a health flexible spending arrangement or a dependent care flexible spending arrangement.
The extension of the period for incurring claims under this guidance is an extension of coverage that is
not HSA compatible, consequently any employee with unused amounts remaining at the end of a plan
year or grace period ending in 2020 or 2021 will not be eligible to contribute to an HSA during the
extend period (unless the FSA is a limited FSA).
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Page 3 of 6 Attachment A
This amendment has been executed this _________________ day of
______________________________________, ________.
Name of Employer:
By:
EMPLOYER
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Page 4 of 6 Attachment A
CERTIFICATE OF ADOPTING RESOLUTION
The undersigned authorized representative of the City of Palo Alto hereby certifies that the
following resolutions were duly adopted on (date) and that such resolutions
have not been modified or rescinded as of the date hereof;
RESOLVED, that the Amendment to the Plan (the Amendment) is hereby approved and adopted,
and that an authorized representative of the Employer is hereby authorized and directed to execute and
deliver to the Administrator of the Plan one or more counterparts of the amendment.
The undersigned further certifies that attached hereto is a copy of the Amendment approved and
adopted in the foregoing resolution.
Date:
Signed:
[print name/title]
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Page 5 of 6 Attachment A
SUMMARY OF MATERIAL MODIFICATIONS
for the
City of Palo Alto
Flexible Benefits Plan
I
INTRODUCTION
This is a Summary of Material Modifications regarding the City of Palo Alto Flexible Benefits Plan
(the “Plan”). This is merely a summary of the most important changes to the Plan and information
contained in the Summary Plan Description (“SPD”) previously provided to you. It supplements and
amends that SPD so you should retain a copy of this document with your copy of the SPD. If you have
any questions, contact the Administrator. If there is any discrepancy between the terms of the Plan, as
modified, and this Summary of Material Modifications, the provisions of the Plan will control.
II
SUMMARY OF CHANGES
American Rescue Plan Act of 2021 Amendment. The Employer hereby amends the Health Care
Flexible Spending Plan within the 2021 calendar year as follows:
Increase in Exclusion for Employer Provide Dependent Care Assistance
Section 9632 of the American Rescue Plan Act (ARPA) amends Section 129(a)(2) of the internal
Revenue code of 1986. In the case of any taxable year beginning after December 31, 2020, and
before January 1, 2022.
The amount which may be excluded for dependent care assistance with respect to dependent care
services provided during a taxable year shall not exceed $10,500 ($5,250 in the case of a separate
return by a married individual).
H.R. 133 Consolidated Appropriations Act Amendment(s). The Employer hereby amends the Plan
as follows:
Post-Termination Reimbursements from Health FSAs
On December 27, 2020, H.R. 133 Consolidated Appropriations Act was signed into law, impacting
section 125 cafeteria plans. This guidance is designed to provide temporary flexibility for
employers and employees and assist with the National response to the 2019 Novel Coronavirus
outbreak (COVID-19).
Effective as of the effective date, the Employer amends their plan to allow for terminated
participants to continue to receive reimbursements from their Health FSA unused funds thru the end
of the plan year their participation ceased. This guidance only applies to the 2020 and 2021 plan
year.
A plan that includes a health flexible spending arrangement shall not fail to be treated as a cafeteria
plan under the Internal Revenue Code of 1986 merely because such plan or arrangement allows
(under rules similar to the rules applicable to dependent care flexible spending arrangements) an
employee who ceases participation in the plan during calendar year 2020 or 2021 to continue to
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Page 6 of 6
receive reimbursements from unused benefits or contributions through the end of the plan year in
which such participation ceased (including any grace period).
The extension of the period for incurring claims under this guidance is an extension of coverage
that is not HSA compatible, consequently any terminated employee with unused amounts remaining
after termination, (including any grace period) will not be eligible to contribute to an HSA during
the post-termination coverage period.
Section 125 Change in Status under the Health or Dependent Care FSA
Effective as of the effective date, the Employer amends their plan to allow for the below change in
status flexibility. This is a temporary change effective only for the plan year ending in 2021.
On December 27, 2020, H.R. 133 Consolidated Appropriations Act was signed into law, impacting
section 125 cafeteria plans. This guidance is designed to provide temporary flexibility for
employers and employees and assist with the National response to the 2019 Novel Coronavirus
outbreak (COVID-19). These changes permit, under certain circumstances, prospective changes to
health and dependent care FSA elections as follows:
a)employees may revoke a health FSA election, make a new election, or decrease or increase an
existing election on a prospective basis; and
b)employees may revoke a dependent care FSA election, make a new election, or decrease or
increase an existing election on a prospective basis.
Employers are not required to allow unlimited election changes but may determine the extent to
which such changes are permitted and applied. Any change allowed shall not permit a revocation
or decrease in election below the amount already disbursed.
Extension of Grace Periods for Plan Years ending in 2020 and 2021
Effective as of the effective date, the Employer amends their plan to allow for the extension of the
Grace Period for plan year ending in 2020 and 2021 to 12 months after the end of such plan year.
In general a plan that includes a health flexible spending arrangement or dependent care flexible
spending arrangement shall not fail to be treated as a cafeteria plan under the Internal Revenue
Code of 1986 merely because such plan or arrangement extends the grace period for a plan year
ending in 2020 or 2021 to 12 months after the end of such plan year, with respect to unused benefits
or contributions remaining in a health flexible spending arrangement or a dependent care flexible
spending arrangement.
The extension of the period for incurring claims under this guidance is an extension of coverage
that is not HSA compatible, consequently any employee with unused amounts remaining at the end
of a plan year or grace period ending in 2020 or 2021 will not be eligible to contribute to an HSA
during the extend period (unless the FSA is a limited FSA).
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