If you were one of the millions of workers laid off in the coronavirus pandemic and you stashed money in a workplace dependent care flexible spending account (FSA) for 2020, you might not have to lose the money you contributed but didn’t spend down yet for child care expenses.
“We’re hearing a lot of employee outcry,” says Judith Wethall, an employee benefits lawyer with McDermott Will & Emery in Chicago.
But here’s a secret: A pre-Covid 19 law might mean you don’t have to forfeit the money you stashed away in your dependent care FSA at work if you’ve been laid off. It’s called the “termination spend down provision.” Here’s how to ask your employer about it.
First, a refresher on the basic rules. If your employer offers a dependent care FSA, once a year, usually in the late fall, you decide how much of your salary you want funneled into the FSA account on a pre-tax basis for the next year. By contributing to the FSA, you save money because you don’t pay income taxes on the amount of your pay that goes into the account. The maximum amount you can contribute, set by your employer, is typically $5,000 a year. It goes into your account on a per paycheck basis.. Once you have money built up in the account and you have child care expenses, you can reimburse yourself from the account: You submit the receipts to pull money out to cover the expenses. If you don’t incur expenses that year, you forfeit the money.
The problem people are facing this year is that the coronavirus pandemic upended child care arrangements. Day care centers were closed. Summer day camps were cancelled.
The CARES Act coronavirus-relief provided some relief: Employers could let workers change their dependent care elections mid-year. Basically, you could stop salary deferrals going into your FSA going forward. That helped, but lots of folks still were left with money that had already gone into the accounts with nowhere to spend it. For workers who stayed on the job, they have the rest of 2020 to incur expenses and use up the money. What if they still don’t have a place to spend it? More help could be on the way—bipartisan legislation would allow parents to roll over unspent money into the 2021 plan year.
But that doesn’t help folks who are laid off. Typically you have to have incurred expenses before your last day at work to submit them for reimbursement. If you’re lucky, your employer plan could include the termination spend down provision. Under that rule, if you were laid off in September, for example, you could incur expenses and submit them through the end of the year.
If your HR department says too bad, don’t give up just yet. Have your employer check the plan documents to see if there is a termination spend down provision. You can check yourself. Ask for a summary plan description, and the official plan document. Check both. Sometimes the provision is in the official plan document but it never make its way into the summary plan description, Wethall says.
There are some employers who are okay with forfeitures. They get to keep the money leftover in the employees’ accounts and use it for administrative expenses.
Most employers try to minimize forfeitures. “The minute an employee loses money, they’ll never put another dime in,” Wethall says.
If you’re part of a two-job household, the spouse with the most stable job should fund the FSA. If you’re uncertain about your expenses, forego the FSA. If you incur child care expenses, you can still claim them on your income tax return via the child and dependent care tax credit. If you’re in a high bracket, the savings won’t be as big, but you won’t risk losing the money you set aside.
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