Flexible spending accounts are about to get more flexible for people who have seen their household budgets upended by the coronavirus pandemic.
Account holders will be able to make mid-year changes on their contribution amounts — either increasing or decreasing the amount — and they’ll also be able to carry over slightly more money into next year, the Internal Revenue Service announced this week.
The agency also said workers will be allowed to enroll in their employer’s health plan outside of the typical open enrollment season. This change enables workers to quickly get themselves and their family on their company’s plan if they’ve previously been covered by a spouse who’s lost their job, one observer noted.
“It give individuals the ability to enroll in coverage and the peace of mind they found healthcare,” said Chatrane Birbal, director of policy engagement at the Society for Human Resource Management.
The spending account rule changes were a “common sense approach,” Birbal added. “Why penalize people who have these accounts? Individuals did not foresee a pandemic occurring” when they made their initial contribution decisions, she added.
The rule changes are part of a larger government effort to give households extra leeway on tax rules when finances could be tight because of job loss and little cash flow. One big example is the Treasury Department decision to postpone the tax payment and filing deadline to July 15.
Tax-advantaged flexible spending accounts let users automatically put away money from their paychecks pre-tax, which they could then spend on child care or medical expenses. The catch is, these plans have a “use it or lose it” feature. For example, the healthcare FSA would let an account holder roll over a maximum of $500 at the end of the plan year, with the rest forfeited. All money in a dependent care FSA has to be spent before the plan year ends.
Some eligible dependent care expenses include day care, preschool, before- and after-school programs and summer day camp. Eligible medical expenses could include certain supplies, medications and out-of-pocket costs on some elective surgeries.
Workers could put away up to $2,750 during the 2020 plan year for a healthcare FSA and $2,500 for dependent care accounts ($5,000 for workers who are married, filing jointly).
Before the IRS changed the rules this week, account holders could not change their contribution amounts mid-year, unless they got married, divorced, had a child or went through another qualifying event that added or subtracted a dependent or spouse in their life.
So the potential advantages to these accounts could turn into a big disadvantage if a person was still tucking away money for preschool, summer camp or an elective surgery — but preschool is closed, summer day camp is a no-go or a physician isn’t performing non-emergency elective procedures.
Furthermore, an account holder might suddenly need the money for other expenses instead, like rent, groceries or other necessities.
The new IRS guidance is meant to give account holders “increased flexibility,” the agency said Tuesday.
- Employees can now roll over $550 into the next plan year on their healthcare FSA.
- They can enroll in an FSA, increase contributions, decrease contributions or stop paying into the account all together.
- These changes apply only for this calendar year.
- Workers can enroll in their own employer-sponsored health insurance plan if they’ve been on another plan, Birbal said. That way, they can bypass pricey COBRA benefits, she said.
There were 20.8 million flexible spending accounts for medical expenses and 4.8 million dependent care flexible accounts last year, according to Aite Group, a research and consulting firm for financial service and insurance companies. The firm estimates that the number of health care FSAs could climb to 22.5 million and the number of dependent care accounts could rise to 5.2 million this year.
“You used to have to make a decision and live with it the entire year,” said Daniel Morris, senior partner at Morris + D’Angelo CPAs, which has offices in California, Oregon and North Carolina. As for the new rules, “Choice is a beautiful thing, it really is,” he later added.
Birbal noted employers sponsoring the plans still have to decide individually how they’ll implement the guidance. Workers looking to make changes will have to fill out new forms, either online or on paper. Employees with questions should contact their human resource department, she said.
There are other ways the feds are loosening rules under the circumstances.
For example, the $2.2 trillion stimulus bill passed in late March includes language that broadens what consumers can spend their FSA money on. The law lets consumers use their healthcare FSA money on feminine hygiene products. It also lets people buy over-the-counter medication, like ibuprofen, without a doctor’s note.
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