Some individuals are discovering their versatile spending accounts are something however versatile throughout the COVID-19 pandemic.
As a result of pandemic, many individuals aren’t sending their children to daycare or spending cash on certified bills like that they had deliberate.
The cash of their accounts is simply sitting there, and that could possibly be an issue.
“We had elected to place $5,000 in, which is the utmost contribution and that’s our regular election,” says Melissa Vernon, a married mom of a 9-year-old daughter in Oconomowoc, WI.
Throughout a standard 12 months, spending that cash often isn’t an issue with college aftercare, summer season camps and work obligations that require in a single day journey.
“In a standard 12 months, our January by way of early June aftercare could be about $900,” she mentioned. “We solely incurred $378 this 12 months.”
By the point she and her husband had been in a position to cease making contributions to their account, that they had already contributed $2,826. Vernon was in a position to pay for a number of small summer season camps and the primary few months of aftercare, however is left with a big sum of money she can’t spend.
Choices for Vernon and others on this predicament rely on the employer and the kind of versatile spending account they’ve.
What is a Flexible Spending Account?
A flexible spending account, or FSA, is an account you can set up with your employer to set aside pre-tax dollars for specific expenses. They are sometimes called cafeteria plans.
Employers take money out of paychecks before taxes to fund the accounts, which are regulated by the IRS. A third party usually administers the accounts and handles reimbursements.
There are two kinds of FSAs:
- HCFSA: This is a healthcare FSA. Individuals can contribute up to $2,750 per year, which can be used to pay for a variety of expenses related to health and medical care.
- DCFSA: This is a dependent care FSA. Parents with children younger than 13 can contribute up to $2,500 individually or $5,000 if married, filing jointly. The money can pay for daycare, preschool, before- and after-school care and summer day camps.
Not all employers offer FSAs, but for those that do, there is an annual enrollment period when employees can decide whether to fund an account and how much to contribute. Employees cannot change the amount they contribute during the year unless there is a qualifying event such as the birth of a child or a change in marital status.
There is one major difference in how the two types of accounts are reimbursed.
In a HCFSA, all of the money you plan to contribute is available at the beginning of the year, meaning you do not need to wait until you have contributed the funds to use them. Basically, your company is fronting the money and relying on you to pay it back over the year.
For a DCFSA, you cannot use the money until you have put it in your account.
So, it’s possible to use health care spending money to pay for a $2,500 dental procedure at the beginning of the year, even if you’ve only put a couple hundred dollars into the account.
In a DCFSA, if you pay $1,000 to reserve a summer camp at the beginning of the year, you must wait until you contribute $1,000 before getting reimbursed.
The money you put into any type of FSA is “use it or lose it,” so if you don’t spend it all on qualified expenses, you forfeit it and any unused money goes to the employer.
On the other hand, if an employee uses all the funds in an HCFSA then leaves the company mid-year, the employer is out that money.
What Has Happened in 2020?
The pandemic has made it difficult for some people to spend all of the money they have set aside in their FSAs, while others need more money than they planned for.
At the onset of the pandemic, many states required hospitals to stop non-essential procedures for a period of time. Schools closed, before- and after-school programs shut down and summer camps were canceled.
Many parents began working from home or lost jobs and no longer needed child care.
“By March, it became pretty clear that there was not going to be any after-care expenditures for the remainder of the school year, and then it became more apparent that there wasn’t going to be a need to spend in the summer either as camps were getting cancelled,” says Stephanie Laguna, a Rockville, MD mother of two children, who had elected to contribute about $2,500 for 2020 to a dependent care account.
Changes for 2020 FSAs
To help with some of these problems, the IRS made changes to FSAs as a part of the Coronavirus Help, Reduction and Financial Safety Act (CARES Act).
“It … has offered extra flexibility by way of permitting mid-year elections to FSA plans,” mentioned Yuletta Pringle, HR Data Advisor on the Society for Human Resource Management. “We’re seeing some employers permitting their staff to make modifications.”
The modifications enable:
- New accounts: Establishing an FSA is feasible exterior of the same old enrollment interval. Perhaps you didn’t want childcare earlier than, however now you do. Perhaps you could have new well being bills you didn’t earlier than.
- Contribution modifications: Will increase or decreases to present contributions are allowed with out a life-changing occasion.
- Carryover: For HCFSAs, carrying over $550 to 2021 is allowed.
- Grace interval: For the plan 12 months ending Dec. 31, 2020, it’s doable to increase the interval to incur new bills and use cash within the FSA.
As well as, extra merchandise are eligible for buy with HCFSA funds, particularly feminie hygiene merchandise and over-the-counter medicines.
Some employers may allow other changes. While that may help employees, it could put a burden on employers.
“Even in a regular year, an employer can lose because an employee can leave before the end of the year and they have already exhausted the funds in their account,” Pringle said.
Laguna received an email from her employer telling her she could make changes to her contributions to her DCFSA.
“I pretty quickly went in to stop my contributions, but by the time that took effect … we had already contributed nearly half of what I was going to set aside for the year,” she said. “By that point, it seemed pretty clear that there was no way I was going to be able to spend what I set aside.”
In an HCFSA, this year the IRS allows a carryover of $550 for 90 days into the next plan year, which is usually March 15. There is no such allowance to carryover money for DCFSAs.
Again, that is an allowed benefit, not a guaranteed one.
“Here again, it’s based on what the employer has allowed in terms of its carryover period,” Pringle said.
What Can You Do About Your FSA?
So what can you do if you still have some extra money in your FSA?
There is still time to spend down HCFSA money. Stock up on eligible supplies. Get a new pair of glasses or stock up on contact lenses.
Companies could allow a grace period for both HCFSAs and DCFSAs, which would allow people a bit more time to spend the funds into 2021. But it is not possible to have both a carryover of funds AND a grace period. It’s either one or the other.
Companies still have time to allow a change to both HCFSAs and DCFSAs. Pringle suggests reaching out to your company’s HR department.
“Share your feedback about how the change in legislation would help (you) specifically,” she said. “In general, (employers) are thinking of how they can help their employees through the pandemic.”
Tiffani Sherman is a Florida-based freelance reporter with more than 25 years of experience writing about finance, health, travel and other topics.