Dependent Care FSA and Carryover – Concerns from COVID-19
Since March 2020, the United States has been reeling from the COVID-19 outbreak. Everyone across the nation has been impacted one way or another. From economic uncertainty to school and public safety concerns, adults and children alike have had to learn to deal with a new reality. One impact of COVID-19 that continues to trouble American workers is their employer-sponsored benefits.
In particular, with schools, summer camps, and child care facilities closing or altering their hours, parents have had to scramble to find alternatives for their school-aged kids. Working adults with a Dependent Care FSA (also called a Dependent Care Assistance Plan or DCAP), could have thousands of unused dollars in their accounts. As the end of the year approaches, people are wondering about their Dependent Care FSA and carryover.
What is a Dependent Care FSA?
A Dependent Care FSA is a tax-advantaged benefit account offered through an employer. When an employee signs up for one, they can contribute up to $5,000 annually pre-tax to help cover the cost of care for their dependents while they work.
- Children age 0-12 years old
- Dependents aged 13 years and older who cannot care for themselves without assistance
A Dependent Care FSA can cover expenses such as daycare, before- and after- school care, summer day camps, adult assistance care, and more. The issue vexing working parents is that the account money is use-it-or-lose-it; you cannot carryover unused dollars.
COVID-19 Relief Efforts to Date
Following the COVID-19 outbreak, Congress, the IRS, the Treasury Department, and other federal agencies rushed to pass several measures to bring relief to American workers. These included:
- Tax filing and HSA contribution extension – the 2020 deadlines were extended from April 15 to July 15
- CARES Act – Coronavirus testing and telemedicine were classified as preventative care (available at no cost); and both OTC medication and menstrual care products were approved as eligible expenses
- FSA carryover expansion – The annual health FSA carryover limit was increased to $550
- Claims runout extension – The claims run out date for some FSA and HRA plans was extended
- COBRA extensions – COBRA beneficiaries have a time period in which to elect coverage and pay premiums
- FSA midyear elections – See more below
Dependent Care FSA and Mid Year Elections
The IRS allowed employers to amend their plans so that participants could update their annual elections for both health and Dependent Care FSAs. If the employer amended the plan, the participant could reduce the annual election or stop contributing altogether.
A caveat is that the participant could only change back to an amount that would not cause a refund. In others words, if you had already contributed $1,000 to your FSA, you could decrease your election to that amount; you could not decrease your election to less than $1,000 and get a refund. Similarly, if you had already filed a claim and received reimbursement for $1,000, you could not change your election to less than $1,000.
Many people are not aware of this update or may not have acted to change their elections under the impression that their kids would have returned to normal care before the year was out. Now those participants could be sitting with hundreds or thousands in unspent funds that they are at risk of losing.
Will there be additional relief?
In several instances since March, Congress has considered a carryover provision for dependent care accounts. In May, a bipartisan bill titled “The COVID-19 Dependent Care Flexible Spending Arrangement Rollover Act of 2020” would allow unused funds to rollover. And in September, Rep. Cindy Axne (D-Iowa) and Rep. Jennifer Wexton (D-Virginia) continued to urge Congress to come up with a bipartisan measure to preserve child care savings.
As we approach the end of the year, Congress is currently debating another round of COVID-19 relief measures. Whether or not Dependent Care FSAs will get a rollover extension remains to be seen, but Congress has taken notice.
With enrollment season in its final weeks, working parents may be looking at what to do for next year. Elect more Dependent Care FSA dollars? Will there be rollover for 2020? Could the annual election amount go up?
These are all questions to keep an eye on in the coming weeks and months.
DataPath, Inc creates cloud-based FSA administration software for third party administrators.