What we’ll cover:
With some child care services out of the picture for many parents for potentially the rest of the year due to the lingering risks of the coronavirus, you may be taking a second look at how much money you’re putting into your dependent care flexible spending account (dependent care FSA) for 2020.
You’re usually not allowed to change your contribution amount (which you set up during open enrollment) unless you meet certain conditions or “qualifying events.” This can be frustrating if you’re contributing more than you actually need for the year.
Dependent care FSAs have a use-or-lose rule: If you don’t spend the money that you’ve contributed by the end of the plan year (or by the end of your employer’s grace period), you’ll have to forfeit it (no carryovers).
Those are the general rules under normal circumstances, but Covid-19 has changed a lot of things, including certain FSA rules.
In May 2020, the IRS issued guidance that allows employers to give FSA participants a little flexibility. If you have an FSA, you may be able to make certain changes to your accounts during the 2020 plan year.
The IRS guidance applies to both dependent care FSAs and health care FSAs. But to keep our discussion as simple as possible, we’re going to focus specifically on how the guidance may affect dependent care FSAs.
Before we get into the details, here’s a quick refresher on how dependent care FSAs generally work.
Parents with dependent care FSAs set up through their workplace can make pre-tax contributions to the account and use the funds to cover certain dependent-care related expenses. These “qualified expenses” may include things like summer day camps, child care services and after-school programs.
If you have older adults (e.g., your parents) who are dependent on you for care, certain related expenses may also be covered. For more information on qualification details, see IRS Publication 503.
During open enrollment each year, you decide how much you want to contribute to your dependent care FSA for the following plan year – up to a maximum of $5,000 ($2,500 for a married individual filing a separate return). Once you’ve made your election, your employer then withholds a certain amount from your paychecks and puts that money in your FSA.
Still with us? Great!
As we’ve mentioned, normally, once you’ve elected (read: set up) your contribution amount, you’re not allowed to go back and change it during the plan year unless you’ve had a qualifying event.
These events might include a change in dependent care cost/coverage (e.g., enrolling in a new daycare), marital status or number of dependents. Talk to your FSA provider or HR department to get a list of these qualifying events.
But, we’re not living in normal times. Because of Covid-19, the IRS has loosened up certain FSA election rules, offering temporary flexibility for participants to make changes during the 2020 plan year.
Specifically, you may be able to:
In addition to offering flexibility to make mid-year election changes, the IRS guidance also gives employers the option to extend the FSA grace period to use 2019 funds from March 15, 2020 through the end of the year.
Wait, remind me – what’s a grace period?
Some employers give their FSA participants a “grace period” or extra time to spend their FSA money if they still have unused funds left in the account at the end of the plan year.
For example, let’s say that at the end of the 2019 plan year (i.e. December 31, 2019), you still have some money left over in your FSA. If your employer provides for a grace period, you have until March 15, 2020 (an extra 2 ½ months) to use up that money in the account. If you still have funds left over after March 15, that money is forfeited.
The IRS guidance basically allows employers to extend the March 15 grace period deadline to December 31, 2020.
In other words, if you have money left over in your dependent care FSA from the 2019 plan year and you didn’t get to use all of it by March 15, 2020, those unused funds could now be used to reimburse for qualified expenses through December 31, 2020, instead of having to be forfeited.
These temporary changes to dependent care FSAs allowed by the IRS may give you a chance to adjust your contributions and more time to use your FSA money in 2020.
Keep in mind also that the IRS guidance issued in May 2020 covers not only dependent care FSAs but also health care FSAs (the one you use to reimburse for medical expenses).
So if you have a health care FSA, too, your plan administrator can also provide more details on how the IRS guidance may impact those specific accounts.
This article is for informational purposes only and is not a substitute for individualized professional advice. Individuals should consult their own tax advisor for matters specific to their own taxes and nothing communicated to you herein should be considered tax advice. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of Goldman Sachs Bank USA, Goldman Sachs Group, Inc. or any of their affiliates, subsidiaries or division. Goldman Sachs Bank USA does not provide any financial, economic, legal, accounting, tax or other recommendation in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA or any its affiliates. Neither Goldman Sachs Bank USA nor any of its affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements or any information contained in this document and any liability therefore is expressly disclaimed.