IF YOUR EMPLOYER OFFERS a flexible spending account, you can set aside tax-free money to pay for medical expenses and child care costs. These accounts can offer valuable tax breaks, but you need to plan carefully. You usually have to use the money by the end of the year or you’ll lose it, and you have limited opportunities to change the amount you set aside after you make your election for the year in the fall.
But the coronavirus pandemic has changed so many people’s lives over the past few months, and your financial situation may be very different than what you were expecting in January. You may have new medical expenses because of the coronavirus, or you may have scheduled doctor’s appointments or elective surgery that was postponed. Your child care situation may have been disrupted if your child’s school, day care center or summer camp is closed – or you may now have more flexible hours working from home and may not need to spend as much for care.
The Coronavirus Aid, Relief, and Economic Security Act, or CARES Act, and recent Internal Revenue Service guidance added more flexibility to these plans. You can now use the medical FSA for more expenses, you have more time to use the money, and you may be able to change the amount of money you set aside in your medical or dependent care FSA in the middle of the year.
Employers are permitted to make these changes, but they aren’t required – it’s up to each employer to decide whether or not to change their plans and add the extra flexibility. If you have a medical or dependent care FSA at work, find out if your employer is making any of these changes, then review your expenses and figure out whether you could benefit from adjusting your contributions for the year.
Here’s a look at the new rules for medical and dependent care FSAs:
- Tax-free withdrawals for over-the-counter drugs and menstrual supplies.
- More time to use health care FSA money.
- New opportunity to increase, decrease, start or stop your FSA elections.
- More flexibility to change dependent care contributions.
Tax-Free Withdrawals for Over-the-Counter Drugs and Menstrual Supplies
The CARES Act lets you use tax-free money from your flexible spending account or health savings account for over-the-counter medications, such as pain relievers, allergy medications, and cough and cold medicines. This permanently reverses a 2009 ruling that only permitted tax-free withdrawals for over-the-counter drugs if you had a prescription.
Even though this change automatically applies to all HSAs, it isn’t automatic for FSAs – employers must change their FSA documents to add this new provision, says David Speier, managing director of benefits accounts at Willis Towers Watson, an employee benefits consulting firm. But most employers are making the change – Willis Towers Watson surveyed employers and found that 7 in 10 have changed their FSAs to permit the tax-free withdrawals for over-the-counter medications, and 7% said they will or may make the change.
Also, you can now use money tax-free from FSAs and HSAs for menstrual and feminine hygiene products, such as tampons, pads and liners, which had not been eligible expenses in the past. Employers don’t have to change their plan documents to permit these tax-free withdrawals.
“Prior to the passage of the CARES Act, eligibility of over-the-counter medications and feminine care products were the two most-often asked questions by site users,” says Jeremy Miller, founder and CEO of FSAstore.com, which sells FSA-eligible products and has a list of FSA-eligible items.
More Time to Use Health Care FSA Money
The downside to FSAs is that you usually have to use the money in the account by the end of the year or else you lose it. Some employers offer a bit of flexibility – rather than a Dec. 31 deadline, they may give you a grace period through March 15 to use the money from the previous year. Or they may let you carry over $500 from one year to the next. (They can’t offer both the grace period and the rollover.)
The IRS is letting employers extend their grace period because of the coronavirus pandemic. If the plan had a grace period for spending 2019 money through March 15, 2020, the employer can now change the plan to extend the date through Dec. 31, 2020. This change can be especially helpful to people who had medical appointments and procedures postponed, says William Stuart, director of strategy and compliance for Benefit Strategies LLC, a third-party administrator that helps employers provide FSAs and HSAs. Employers can choose whether or not to make this change to their FSAs.
Also, starting in 2020, the carryover rises from $500 to $550 and will be adjusted for inflation.
New Opportunity to Increase, Decrease, Start or Stop Your FSA Elections
You can set aside up to $2,750 pretax to a health care FSA for 2020 if offered by your employer. This maximum is per plan – your spouse can also contribute up to $2,750 to a medical FSA if he or she has a plan at work, too.
You usually can’t change the amount of money you elect to contribute to the FSA in the middle of the year unless you’ve experienced certain life changes, such as marriage, divorce, birth, adoption or death. But because many people’s financial situations have changed in the past few months, the IRS is letting employers offer a special midyear open enrollment period so employees can start, stop, increase or decrease their FSA contributions for 2020. Not all employers are making this change, and it’s up to the employer to decide when and how long to offer the new enrollment period. (You can decrease your election, but you can’t take out money you already put into the account, unless it’s for eligible expenses.)
More Flexibility to Change Dependent Care Contributions
You can contribute up to $5,000 per family to a dependent care FSA in 2020 if offered by your employer (if both you and your spouse’s employers offer dependent care FSAs, the maximum contribution is still $5,000 combined). Your contributions are pretax, and you can use the money tax-free to pay for child care expenses for children under age 13 while you and your spouse work (or look for work). The cost of day care, a nanny, preschool (but not kindergarten or later), before-school or after-school care and even summer day camp are eligible expenses.
But your child care situation may be very different than you expected when you decided how much to contribute for 2020. Your child’s day care center or summer camp may have closed, or you may have had extra child care expenses while schools were shut down. You may be working from home and may not need to spend as much on child care if your hours are more flexible. Or you may just not feel comfortable sending your child to day care even if it is still open.
You may want to change the amount of money you contribute to the dependent care FSA based on your new child care needs, or you may want to start or stop your contributions.
You could always make some changes to your dependent care contributions midyear if you experienced certain life changes, such as marriage, divorce, birth, adoption or death. And you could also start, stop or change elections because of changes to your work schedule, hours worked, work location, or cost or availability of eligible care, says Stuart. “The existing dependent care FSA rules gave adequate flexibility in most cases in response to the pandemic,” he says. “But some people were still stuck.”
The new rules add even more flexibility. Now employers can offer a special midyear open enrollment period where employees can enroll, increase or decrease their contributions. Employers have to adopt the change for it to take effect, and they don’t have to open up enrollment to both their medical and dependent care FSAs.
If you’d like to make changes to your dependent care election in the middle of the year, ask your employer about its rules – some changes qualify under the current law, but others require the employer to open a new enrollment window. “Closure of a summer camp would be a qualifying event under current law,” says Speier. “Working from home or just not wanting to spend more on the summer camp would require the employer to open a new window that is now allowed under the CARES Act. If the company opens a new window, they will likely allow the employee to make the change for any pandemic-related reason.”
