Lots of people are finding their flexible spending accounts less adaptable than they expected during the COVID-19 crisis.
Because of the pandemic, many parents aren’t sending their children to daycare or paying for eligible expenses the way they had anticipated.
The funds in those accounts are simply sitting idle, and that can create issues.
“We had elected to put $5,000 in, which is the maximum contribution and that’s our normal election,” says Melissa Vernon, a married mother of a 9-year-old daughter in Oconomowoc, WI.
In a typical year, using that money isn’t difficult thanks to aftercare, summer camps and work obligations that required overnight travel.
“In a normal year, our January through early June aftercare would be about $900,” she said. “We only incurred $378 this year.”
By the time she and her husband could stop putting money into their plan, they had already contributed $2,826. Vernon used some of the funds on a handful of summer camps and the first months of aftercare, but she’s left with a large balance she can’t spend.
What options are available for Vernon and others in similar situations depends on the employer and the specific type of flexible spending account they have.
What Is a Flexible Spending Account?
A flexible spending account, commonly called an FSA, is a program offered through your employer that lets you set aside pre-tax dollars for certain expenses. They’re sometimes referred to as cafeteria plans.
Employers deduct money from paychecks before taxes to fund these accounts, which are subject to IRS rules. Typically a third-party administrator manages the plan and processes reimbursements.
There are two main varieties of FSAs:
- HCFSA: That’s a healthcare FSA. Individuals can contribute up to $2,750 per year, and the money can be applied to a range of health and medical costs.
- DCFSA: This is a dependent care FSA. Parents of children under 13 can put in up to $2,500 each or $5,000 if married and filing jointly. These funds cover daycare, preschool, before- and after-school care and summer day camps.
Not every employer provides FSAs, but those that do have an annual enrollment window when employees choose whether to enroll and how much to fund. Contributions are generally fixed for the plan year unless a qualifying life event occurs, such as the birth of a child or a change in marital status.
There is a key distinction in how the two account types are accessed.
With an HCFSA, the full amount you elect to contribute is available at the start of the year, so you don’t have to wait until you’ve actually put the money in to use it. In essence, your employer fronts the funds and expects you to repay them via payroll deductions over the year.
By contrast, a DCFSA requires you to have contributed the money before you can be reimbursed.
For example, you might use healthcare FSA dollars to cover a $2,500 dental procedure early in the year even if you’ve only contributed a few hundred dollars so far.
With a dependent care FSA, if you pay $1,000 to reserve a summer program at the start of the year, you must wait until you’ve deposited $1,000 to your account to be reimbursed.
Funds placed in any FSA generally follow a “use it or lose it” rule; if you don’t spend them on eligible expenses, you forfeit the remainder, which typically reverts to the employer.
Conversely, if an employee utilizes all of the HCFSA money and then leaves the job mid-year, the employer absorbs that loss.
What Changed in 2020?
The pandemic has left some people with leftover FSA balances and others needing more money than they expected.
Early in the pandemic, many states ordered hospitals to postpone non-essential procedures. Schools closed, before- and after-school programs paused and summer camps were canceled.
Many parents shifted to remote work or lost employment and no longer needed childcare.
“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, who had planned to contribute roughly $2,500 in 2020 to a dependent care account.
Adjustments for 2020 FSAs
To ease some of these issues, the IRS issued changes to FSAs under the Coronavirus Aid, Relief and Economic Security Act (CARES Act).
“It … has provided more flexibility in terms of allowing mid-year elections to FSA plans,” said Yuletta Pringle, HR Knowledge Advisor at the Society for Human Resource Management. “We’re seeing some employers allowing their employees to make changes.”
The modifications permit:
- New enrollments: You may be able to open an FSA outside the standard enrollment period. Perhaps you didn’t need childcare earlier but do now, or you have new health expenses that require funding.
- Contribution adjustments: You can increase or decrease current contributions without needing a qualifying life event.
- Carryover: For HCFSA plans, up to $550 may be carried into 2021.
- Grace period: For plans ending Dec. 31, 2020, employers may extend the window to incur eligible expenses and use FSA funds.
Additionally, more items are now eligible for HCFSA purchases, specifically feminine hygiene products and over-the-counter medications.
Some employers may permit additional accommodations, but that flexibility can create challenges for 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 said her employer emailed her saying she could alter 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.”
For HCFSA plans this year, the IRS permits a carryover of $550 for 90 days into the next plan year, typically through March 15. There isn’t a comparable carryover for DCFSAs.
Again, that’s an allowed option, not an entitlement.
“Here again, it’s based on what the employer has allowed in terms of its carryover period,” Pringle said.
How Can You Manage Your FSA?
So what steps can you take if you still have an unused balance in your FSA?
There’s still time to use down HCFSA funds. Stock up on eligible supplies, get new glasses or purchase extra contact lenses.
Employers might offer a grace period for both HCFSAs and DCFSAs, giving employees extra time into 2021 to spend the funds. But employers cannot offer both a carryover and a grace period — it’s one or the other.
Companies also have the option to allow changes to both HCFSA and DCFSA elections. Pringle recommends contacting your 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.”
If you’re looking for additional guidance on finances during this time, resources like suze orman pandemic advice and general money advice can be useful.
Taylor Monroe is a freelance reporter based in Florida with more than 25 years of experience covering finance, health, travel and related topics.
