30 Nov Will we lose unused day care funds in our flex spending account?
Q. We have kids who use day care and each year we put aside money in a flex spending account to realize tax benefits of this typically fixed expense. With day care closed because of COVID, we were unable to expend those funds. Will we lose them this year as we would in a normal year?
A. The coronavirus pandemic has upended lots of well-meant financial plans.
Dependent care flex spending accounts (DCFSA) allow you to set aside money on a pre-tax basis and the funds are reserved to reimburse you for dependent care expenses.
This is an annual election you make when selecting your employee benefits, said Laurie Wolfe, a certified financial planner and certified public accountant with Lassus Wherley, a subsidiary of Peapack-Gladstone Bank, in New Providence.
She said amounts elected for a DCFSA are limited to $5,000, per year, per family and must be used for childcare expenses incurred within that year. Those contributions go into the account over the course of the year through paycheck deductions.
Changes made to flexible spending arrangements were previously allowed only if you experienced a qualifying life event, Wolfe said.
In the case of a DCFSA, these included such things as a change in the dependent’s eligibility due when the child reaches age 13, a change in the care provider or a significant cost increase, she said.
There have been some changes this year that were made in response to the COVID-19 pandemic.
“Those changes allowed employers to open a mid-year enrollment period regardless of having a qualifying life event,” she said. “It enables — but does not require — an employer to allow for new elections and changes to current elections.”
But unfortunately, in either case, if your plan year is a calendar year, you are late in the year to have those changes make much of a difference, Wolfe said. That’s because amounts that you already contributed can not be taken out without incurring eligible expenses by Dec. 31, 2020, she said.
However, if your plan year is a fiscal year, for example with a June 30, 2021 year end, being able to make a change now could benefit you, Wolfe said. That’s because you are still in the middle of the year. You would have to ask your employer if the plan allows for these changes, she said.
“If you can’t benefit from this, more help may be on the way in the form of new legislation which, if enacted, would allow you to roll over unspent money into 2021,” Wolfe said. “If that does not happen, unfortunately, you would forfeit the money.”
You should consult with your own tax professional to review your personal situation.
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This story was originally published on Nov. 30, 2020.
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