Since early 2020, the U.S. has been reeling from the COVID-19 pandemic. Everyone throughout the country has been impacted in 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 Flexible Spending Account (DCFSA, 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. By signing up for one, an employee can contribute up to $5,000 annually pre-tax to help cover the cost of care for their dependents while they work.
Eligible dependents:
- Children from birth through age 12
- 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 many working parents is that these accounts are use-it-or-lose-it; you cannot carry over unused dollars.
COVID-19 Relief Efforts to Date
Following the COVID-19 outbreak, Congress, the Internal Revenue Service (IRS), and other federal agencies rushed to pass several measures to bring relief to American workers. These included:
- Tax filing and HSA contribution extension – Deadlines for 2020 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 medications and menstrual care products were approved as eligible expenses
- FSA carryover increase – 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 longer 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 The IRS is allowing employers to amend their plans so that participants can update their annual elections for both health and dependent care FSAs. If the employer amends the plan, the participant can reduce their 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 they had contributed $1,000 to their FSA so far, they could not decrease their election to less than $1,000 and get a refund. Similarly, if they had already received reimbursements for $1,000, they could not change their election to less than $1,000.
Many people whose employers have amended their plans may not be aware or may not have changed their elections because they expected their kids would return to normal care before the year was out. Now those participants may be sitting with hundreds or thousands in unspent funds that they are at risk of losing.
Will there be additional relief?
As the National Emergency has continued, the government has re-evaluated the legislation and regulations enacted previously to provide relief. Some initiatives have already expired, while others have been added. Recent additions include:
- IRS Notice 2021-15 gave employers more flexibility in managing their employees’ health FSA and DCAP accounts.
- IRS Notice 2021-58 addressed the extension and payment issues relating to COBRA coverage.
As we continue to work through the COVID-19 pandemic, it’s more important than ever to consult with a Third-Party Administrator (TPA) or qualified benefits counsel to ensure understanding and compliance with a frequently changing regulatory environment.
DataPath, Inc creates cloud-based FSA administration software for third party administrators.
