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The physical distancing measures implemented during the pandemic have left your childcare arrangements up in the air. Will your daycare reopen? If it does, will it be safe to send your children there? What will happen to before-and-after school care? And if you intended to use a dependent-care flexible spending account (FSA) for these expenses, you may be wondering whether you’ll lose the money you were saving to help cover those costs.
Recent Changes for FSAs
Due to the pandemic, the IRS has modified its regulations to make it simpler for people to access the benefits coverage they need. Employers can now offer a mid-year open enrollment period, allowing employees to change, add, or remove health insurance and related coverage without needing to prove a qualifying life event to justify the changes.
Watch out for two more updates that could influence your FSA:
If your employer permits rolling over unused funds into the next year, you can now carry over up to $550, a slight increase from the previous $500. The maximum contribution limits stay the same: $2,750 per household for a medical FSA, and $5,000 for a dependent care FSA.
If your employer grants a grace period, giving you extra time to use last year's funds, they can now allow you until the end of 2020 to use those contributions.
Your employer may only offer one of these options, if they provide any at all.
As Craig Keohan, Chief Revenue Officer at HSA provider HealthSavings, noted, 'The new ruling seeks to tackle some of the FSA’s limitations. The changes underscore the FSA's restrictions, as it is an employer-funded, use-it-or-lose-it account.'
These updates are not automatically applied.
When your employer announces another open enrollment period, it’s the perfect chance to reassess your healthcare and dependent care needs. You can make adjustments to your coverage that align with your financial situation. However, keep in mind that there’s no assurance your employer will offer this opportunity.
“FSAs are essentially managed and structured by the employer,” stated Shobin Uralil, co-founder and COO of health savings account provider Lively. “Employers face a range of compliance challenges that they must address.” During the pandemic, he mentioned that employers might not have the bandwidth to manage the extra workload.
If you’re uncertain about your contribution settings or your benefits coverage at the moment, don’t wait for further updates from your HR department—reach out and ask if another enrollment period will be held. Also, bear in mind that additional changes might be in the works.
“We’re navigating a landscape filled with more uncertainties than certainties,” Uralil remarked. “I don’t believe we’ve heard the last of the IRS in regard to coronavirus.”
What should you do if you are able to adjust your benefits?
If you don't foresee needing childcare in the near future, or if you're in need of some extra cash right now, Uralil suggests halting your contributions. However, remember that any extra cash in your paycheck will be subject to taxes, unlike the funds in your FSA contribution.
But if you anticipate needing care before the year ends, it might be a good idea to maintain your current contribution level or even consider increasing it.
Should your employer open up another enrollment period, you might want to explore alternative coverage options. If you can switch to a high-deductible health plan, you could set up a health savings account (HSA), which lets you save pre-tax dollars without the concern of 'use it or lose it.' Your contributions remain with you year after year, even if you leave your job.
Although it might not immediately ease your childcare expenses, adjusting your contributions for medical costs could offer long-term stability and peace of mind amid the short-term fluctuations you're facing.
