WASHINGTON — You’ve set aside money in your dependent-care spending account for summer camp. But there’s no camp this year, thanks to the Coronavirus.
Or maybe you were saving up to finally get some dental work done. But your dentist’s office is closed, or you’re uncomfortable about keeping an appointment given the continual spread of COVID-19.
During your employer’s “open enrollment” period last year, you may have elected to have money taken from your paycheck, pretax, to pay for dependent care or for certain medical expenses not covered by your health plan.
Now the pandemic has put a lot of your spending on hold. As a result, the IRS recently relaxed rules for employer “cafeteria” plans, employee benefit packages that include flexible spending accounts (FSAs) for dependent-care and health care expenses.
Typically, unless you have a life-changing event — such as marriage or childbirth — after the open enrollment period ends, you can’t make changes to the cafeteria plans offered by your employer.
But these aren’t typical times. Because of COVID-19, the IRS has issued new guidance that addresses “unanticipated changes in expenses.”
Workers can now make changes to FSAs or health care plans. The caveat is that an employer has to agree to open plans up and must determine what changes to allow. Depending on what the employer allows, employees may be able to drop out of their health insurance if they have another option, or sign up for insurance if they didn’t do so during open enrollment last year, according to David Speier, managing director of benefits accounts for the insurance brokerage Willis Towers Watson.
If workers have been furloughed or had their pay cut, this temporary rule change could give them the option of electing a lower-cost health insurance plan or switching tiers within the same plan.
With an FSA, you can set aside money, pretax, to pay for dependent care or certain health expenses. People decide how much they want to contribute during open enrollment.
Now, amid the pandemic, some people may be regretting their choices. Life has been interrupted. Many activities and expenditures have been curtailed. So, what to do with the money in an FSA? It is a use-it-or-lose-it account, meaning that if there is money left over, you won’t get it back.
For example, maybe last fall you planned to send your child to a two-week theater camp. Although the camp says it will open for the summer, you don’t feel comfortable sending your child because of the virus. Or maybe you no longer need before- and aftercare, because you’re working from home.
Under the IRS guidance, employees can ask their employers to stop taking money out of their paycheck for FSA-qualified expenses.
“I think it was very reasonable for the government to say, ‘We’ve got to loosen these rules, because we can’t predict every circumstance where people would really need a right to change their FSA dependent-care or even their health care plan,’” Speier said. “And on top of it, they gave the employer the flexibility that they need if they have a circumstance where they can’t do it.”
An FSA for dependent care can be used to cover costs for day care, preschool, before- and aftercare or summer camps. The money has to be used on a child under 13, a disabled spouse, or an older child who cannot care for himself or herself and lives with you for more than half the year.
The maximum dependent-care FSA contribution for 2020 is $5,000 for individuals or married couples filing taxes jointly, or $2,500 for a married person filing separately.
Qualified medical expenses can include co-pays, deductibles and over-the-counter medication. For 2020, employees can contribute up to $2,750 to a health care FSA, including accounts set up specifically for dental and vision care services.
If your employer allows it, you can carry over up to $500 of unused FSA contributions to the next year. The recent rule change increased the rollover by $50. Speier also noted that, under the recent guidelines, employers that provide for a grace period could allow workers to extend it to use 2019 funds from March 15 until the end of 2020. These changes must also be adopted by the employer, he said.
“Just keep in mind that employers don’t have to follow the guidelines,” said IRS spokesman Eric Smith. For example, employers don’t have to exercise the option to offer a special midyear election that would allow workers to sign up for a health care plan, end participation, or raise or lower FSA contributions.
“So employees whose employers offer FSAs are well-advised to ask or watch for communications from their plan administrator about their options, if any,” Smith said.
FSAs provide a valuable tax break. But during the pandemic, some taxpayers will have to reconsider those contributions as a source of needed funds right now.