You Can Now Change Your FSA Contributions Midyear. Here’s What You Need to Know.

You Can Now Change Your FSA Contributions Midyear. Here’s What You Need to Know.

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While having a midyear redo sounds great in theory, especially after a tumultuous beginning to 2020, figuring out what’s best for you and your family isn’t easy.

“If you’ve been stocking up savings in your FSA, the big issue now is whether or not you can actually take advantage of it,” said Sharif Muhammad, a certified public accountant based in New Jersey. “Even if things reopen, do you feel comfortable sending your kid to summer camp?”

What is an FSA?

A flexible spending account, or an FSA, lets you save pre-tax money for certain health- or dependent-care expenses. The trade-off, though, is that you’ll need to spend your savings pretty quickly, lest it disappear completely.

With a health-care FSA, you can stow away up to $2,750 of your pay throughout the year and then use those savings on eligible, health-related expenses such as co-pays and medications. You can roll over up to $550 in unspent FSA funds into the next plan year, but you typically have to use whatever you carry over within a few months. You’ll lose any remaining balance above $550.

Similarly, you can enroll in a dependent-care FSA (DCFSA) to help you cover eligible expenses (such as those for day care or summer camp) related to the care of both children under the age of 13 and adult dependents. You can set aside up to $5,000 a year in pre-tax money to cover those expenses.

You decide how much you want to save in either account (up to the maximum contribution limit) during your annual open enrollment period, which usually takes place in the fall. Once you settle on how much you want to save, though, it’s typically very hard to change course. Until now.

What’s changed with health FSAs

The IRS announced in May that employers can allow workers to make midyear changes to their FSA contributions. (Employers don’t have to let you do this.) The ruling was rare, reflecting how dramatically COVID-19 has upended how Americans spend their money. Here’s what you need to know:

  • You can increase, decrease, or stop your health-care FSA contributions altogether.
  • You have more time to spend your health-care savings from 2019. In the past, you had a two-and-a-half-month grace period after your plan period ended in which to spend your remaining balance, but your employer can now opt to extend the grace period through December 31, 2020.
    • This sets up a tricky scenario wherein any FSA savings lost after the grace period should still be in your account, according to the rule change. Contact your HR department to re-collect these funds now that you have all of 2020 to use them. “Be in close communications with your plan provider,” Muhammad said. “While some plans are on top of it, you may need to be vigilant in saying to your HR or benefits department, ‘There’s been IRS guidance saying people are allowed to make changes.’ They ultimately have to make the call.”
  • You can roll over up to $550 into your 2021 health-care FSA, a $50 increase over the previous $500 limit.

The maximum you can contribute for the 2020 calendar year is still $2,750.

What’s changed with dependent-care FSAs

Likewise, the IRS is allowing parents to alter their dependent-care FSA contributions. (Again, your employer has to be on board for you to take advantage of this.)

  • You can increase, decrease, or stop your dependent-care FSA contributions altogether.
  • You now have until December 31, 2020, to spend your dependent-care savings from 2019 (rather than the usual two-and-a-half-month grace period).
  • The same weird scenario from above applies. If you think you’ve lost your unused DCFSA contributions from 2019, contact your HR department about restoring your access to those funds.

The maximum you can contribute for the 2020 calendar year is still $5,000, depending on your tax-filing status (though that limit has remained the same since Congress set the original cap in 1986).

Do all FSA plans allow you to make changes?

Employers are not obligated to implement these changes, although larger businesses are probably more likely to opt in than smaller ones, Muhammad said. (Companies with more robust HR departments may be better equipped to process the changes.) Muhammad added that it’s too early to tell how many employers will allow their workers to take advantage of the new flexibility, but if you’re wondering, just ask your HR or benefits department.

Source: NY Times – Wirecutter
Keyword: You Can Now Change Your FSA Contributions Midyear. Here’s What You Need to Know.

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