Changes to Dependent Care Flexible Spending Accounts Due to COVID-19

[An update on temporary guidance for DCAPs can be found here: Finally—Additional Relief for Dependent Care Assistance Programs Due to COVID-19, 1/21/21]

In March and April, as states first began releasing their “shelter-in-place” orders, plan sponsors had to deal with questions about all aspects of their businesses, including their employee benefits programs.

The International Foundation’s Personalized Research team received many questions about COVID-19 during that time, including questions about whether dependent care assistance programs (DCAPs) could allow participants to make mid–plan year changes as a result of the unanticipated daycare, preschool and school closures parents faced, while either working from home or not working at all and suddenly not needing to pay for child care.

For employers that offer dependent care flexible spending accounts, there are several things to consider.

Changes to Dependent Care Flexible Spending Accounts Due to COVID-19

IRS Releases COVID-19 Guidance Under Section 125 Cafeteria Plans

On May 12, 2020, the Internal Revenue Service (IRS) released temporary guidance in Notice 2020-29 as a result of the public health emergency posed by COVID-19. The notice details several new optional amendments impacting Section 125 cafeteria plans, health plans, flexible spending arrangements (FSAs) and DCAPs.

Plan sponsors may now consider implementing these changes to allow for flexibility when addressing the situations participants are concerned about—such as an increase or decrease in the need for dependent care assistance due to the closure of schools and child care providers as well as changes to the employee’s work location or schedule.

Prior to the New Guidance, What Changes Were Allowable for DCAPs?

CEBS

Enrollment in the DCAP could only be made at open enrollment, prior to the plan year. Only a few exceptions for mid–year plan changes were typically allowed, if the changes were already addressed in the plan document, including:

  • Employee status changes, such as changes to marital status, number of dependents, etc.
  • Employment status changes, such as moving from full-time to part-time hours, etc.
  • Cost or coverage changes, such as switching the child’s paid provider to free care
  • An employee taking FMLA leave.

What’s Changed for 2020?

The new guidance from the IRS allows cafeteria plans to permit the following prospective changes, even if they do not have a permissible change-in-status event:

  • Participants can revoke an election, make a new election, or increase/decrease the amount of an existing election.
  • Employers are permitted to limit mid–year elections to amounts no less than amounts already reimbursed.

Due to the unanticipated changes in the availability of dependent care, employees may be more likely to have unused DCAP amounts at the end of plan years or grace periods ending in 2020 and may wish to have an extended period during which to apply their unused DCAP amounts to pay or reimburse dependent care expenses. The plan sponsor can, as of the end of a grace period ending in 2020 or a plan year ending in 2020, pay or reimburse expenses incurred for dependent care through December 31, 2020.

The new guidance does not change the DCAP allowable expenses described in IRS Publication 503. Also, the guidance does not address the timeliness of participants making changes. Generally, requests should be made on a timely basis and within 30 days from the event, depending on the language of the plan document.  

If Making Changes to the DCAP, What’s Next?

Today, as many businesses evaluate their reopening processes, plan sponsors and benefits professionals should update their communications to employees and be able to answer questions such as:

  • Can I stop my salary deferrals if I’m working from home and no longer need child care?
  • I’m not currently participating in the DCAP but now have child care expenses due to schools being closed.  Can I now start an election?
  • Can I increase or decrease my election amount?
  • What happens if I’m laid off or terminated?
  • What happens if my spouse faces a leave of absence or layoff?

The Bottom Line on the New Guidance for DCAPs

Plan sponsors are not required to adopt any of these new amendments; however, the guidance now creates flexibility to change the plan so participants can revoke, add, increase or decrease 2020 elections on a prospective basis. To do this, plan sponsors should review plan change requirements with their service providers and make changes on or before December 31, 2021. Any amendments apply to plan year 2020 for dependent care expenses incurred through December 31, 2020. If amending, plan sponsors should communicate the changes to all eligible employees so that they can plan accordingly.

[Upcoming Online Workshop: Change Management Workshop | December 3-4, 2020 | Register Now!


Anne Newhouse, CEBS
Information/Research Specialist at the International Foundation of Employee Benefit Plans

The latest from Word on Benefits:

Anne Newhouse, CEBS

Information/Research Specialist at the International Foundation of Employee Benefit Plans Favorite Foundation Service: The Information Center! Members having the ability to have an information specialist research their topic is a great benefit. Favorite Foundation Moment: Attending the 2013 CEBS conferment ceremony in Boston as an official CEBS graduate. Benefits Related Topics That Interest Her Most: Benefit communication—helping employers understand what employees want and the way they want it communicated to them. Personal Insight: Anne may spend her days in the International Foundation employee benefits library, patiently researching answers to member questions—but after work, she’s ready to move with a bike, hike or walk in the great outdoors.

47 thoughts on “Changes to Dependent Care Flexible Spending Accounts Due to COVID-19

  1. Ben Watson

    Has there been any additional information with regards to money ‘stuck’ in dependent care accounts? When the change happened early in the year, I stopped contributing. We exclusively use our money for summer camp day camps and now have a bunch of money ‘stuck’ in that account due to the pandemic. We have had NO child-care costs this year. Based on the past rules, that means I will lose that money.

    I would gladly pay the taxes to withdraw the money in the account as normal income this year. As I have to consider enrolling for next year, with the possibility of no summer camp again, I can’t risk putting that money into the account and losing it.

    There hasn’t been any legislation to address these concerns, had there?

    1. Jennifer K

      I have a very similar situation – my employer allowed us to stop contributing over the summer, but by that point I had contributed a lot of funds that we could not use over the summer as planned. It would be wonderful if we could roll over this money for 2021 if nothing else.

  2. Rana

    So is there no way to get our dependent care money reimbursed?
    Is it up to each individual employer to take action on this matter?

  3. Ben W

    Unfortunately, as I understand it, no, it is not up to the Employer right now. By law, the money is use-it-or-lose-it. Whether they want it or not, the money goes back to your Employer (just like in past years).

    The best thing you can do is call your senator and your House representative and let them know this is a problem. The “good” news is that they can wait until January and pass something retroactively. If you do reach out to Congress, suggest that simply rolling over the money may not be acceptable. It could just be kicking the can down the road…like what they did when they changed the law this year. We stopped contributions but never addressed what to do with un-needed money. Just rolling it over could do the same thing.

    My suggestion is to NOT contribute for next year because we could be in the same position.

    Hopefully next year they will let us modify our contributions later in the year (so we can contribute after the fact), but since most of us have to sign up now, better to be safe than sorry.

    1. Anne Newhouse

      Thank you for your comments and questions. Since the temporary guidance was released in May 2020, there has been no additional modifications or revisions released as the pandemic has continued. The best way to address any questions you have is to speak with your employer about their plan and confirm if they have adopted any of the mid-year change options available due to the guidance. The employer can also speak with their FSA TPA or benefits attorney for further clarification on any changes they can make to help employees.

      At the International Foundation, we are watching for any extensions or modifications that the IRS provides and are prepared to update our blogs and other features on this topic if anything further is released.

    2. Tracy C

      Thank you. This is helpful information.

  4. Danielle

    I am continuing to monitor this, as well. I am in the same situation of allotting the money specifically for summer camp. The other complication I may face is – if they allow the money to roll over into 2021, my son will age out.

  5. Steve N

    I have heard that the DOL is aware of the issue, but things are not moving quickly right now in Washington.

  6. Aaron

    I have very similar situation. Money left in my DCFSA and will lose it at the end of the year. When the left over dollars go back to the employer can they choose to pay it out to the employee? I would gladly pay tax on it .

    1. Danielle Cornejo

      Curious – did you receive a reply? I’m wondering if the employers have a say in this, as well. I am the only affected party at my company so am having to keep on top of this.
      Thanks!

  7. Ben W

    As I said above, I am 99% sure, until the federal law changes, any money in the accounts will be lost as the law is right now. (That could be changed this year or even retroactively next year by Congress.)
    One clarification my employer made today (as our last day to sign-up for next year) is that due to Covid, a need for Dependent Care (due to a vaccine for example) would be considered a life changing event in 2021. So, my decision to not contribute now (since I don’t want to lose more money), won’t be permanent if my kids do end up going to summer camp next year.

  8. JS

    I just found out today, my contributions will be returned to my employer at the end of the year, is it possible to use this for the expenses incurred having to buy computers for my kids to remote school?

  9. Shannon Hemmelgarn

    I just contacted my congress person and am awaiting an answer on how he can help.

  10. Zina Grooms

    My son is 4 and attends a private school, the tuition should count as dependent care right?

    1. Thomas Economous

      I used a DCA Account for pre-schoool payment. From what I remember in the rules K-12 schooling does not count as dependent care.

  11. Charlz C

    I’m in the same boat. I’m hoping Congress can do something quickly.

  12. NIcole

    Following this thread, b/c I am also in the same boat. It’s frustrating.

  13. BM

    I am also on the same situation. Hoping congress will help in this matter.

  14. Christine

    Same here. I’m going to lose $1500. I could really use the money (just like every other working family in my situation) for distance learning supplies. Frustrating for sure…

  15. Michelle

    I’m in the same boat. I have had no childcafe costs this year because of the pandemic and I need to get the stuck funds back. I would gladly pay the tax on it, I just don’t want to lose it. In any other year I’d understand the rules but surely a global pandemic is reason to make an exception.

  16. SenthilPrasad

    We are also in the same situation.

  17. LP

    …..following! My husband got laid off. We need the money that is stuck in the account.

  18. Adam R

    Same here

  19. Charlotte

    I just sent a note to my provider asking for an update. If congress does not succeed in changing the federal law we should seriously consider launching a class action lawsuit. Clearly this is affecting many households across the nation and something needs to be done.

  20. Ben W.

    I have written to both my Senator and my House Representative. My representative wrote back and the House “Heroes Act” that was passed in May and then again in October both included provisions to allow full FSA and DSA rollovers into 2021. While that isn’t a complete solution, it at least allows us to potentially spend the money in the future instead of losing it now.

    The senate has yet to vote on the Heroes Act however. Also, to the best of my knowledge, the current senate propositions (although I could be wrong) don’t include FSA or DSA legislation.

    Best bet is to reach out to your senators, especially if your senator is in the majority (republican). Senate leadership has never brought the Heroes Act up for a vote. While it has passed the House it hasn’t been voted on by the Senate. If the Senate votes is down or the President refuses to sign it, that is something to discuss with your senator. For now however, the Senate majority isn’t even allowing it to be voted on.

  21. Tamieka B.

    We are in the same boat.

  22. Justin H

    I too am facing this problem with the dependent care FSA. Pandemic eliminated the childcare costs but I couldn’t find a way to stop the withholdings.

  23. Jianan

    Same boat…

  24. Christine Robbins

    I am on that boat, too and cannot afford to lose the nearly $2K that is stuck in my dependent care account. It’s been very difficult to find any current information on this topic, so I am grateful that I found this site!

  25. Rocky S

    In the same boat. Hopefully, our elected representatives can do something about it. It is a clear case where the taxpayers are going to lose large sums of money for no fault of theirs. Not doing something to address this is not the right thing to do. Does anyone know what is the current total in FSA balance that taxpayers stand to lose?

  26. Ramesh

    following

  27. Debapriya kundu

    following

  28. Debapriya kundu

    I am following. same boat/

  29. Anisha

    Following

  30. Sarvesh Sharma

    I’m in the same boat. I have had no childcafe costs this year because of the pandemic and I need to get the stuck funds back. I would gladly pay the tax on it, I just don’t want to lose it. In any other year I’d understand the rules but surely a global pandemic is reason to make an exception.

  31. Taxpayer>750

    Same. I found this thread by searching for class action lawsuit. Let’s hope for a more reasonable, proactive solution.

  32. John H.

    Can’t believe it, took 8 months for stimulus package to give $600 of relief. The amount of time it took legislature to get the bill passed probably costed a hefty overhead to the outcome of the stimulus.

    I’m also affected by the accumulated unexercised DCFSA, and not holding my breath to have any solution for working families.

    Politicians seem to spend more time blaming the inactivity of opposing party, then to perform any duties they, themselves, are responsible for.

    So sad to see my $2000 allocated income washed down the drain, when all that needed to be done was extend the expiration period. Instead, we are going to hear Republicans this, Democrats that…

  33. Eve

    Following

  34. Christopher

    Following

  35. Ben W

    The latest bill will HELP many of us. Finally!!! We can now use 2020 money in 2021 and possibly even into 2022. A few key points from the articles linked below.

    – For the person who had a child who would age out in 2021, they increased the age from 13 to 14.
    – There are a few options that your company can adopt (by changing their plan)
    1) They can allow you to rollover all the 2020 money into 2021.
    2) They can allow you to use money left at the end of 2021 for up to 12 months in 2022.
    3) For the plan year ending in 2021, they can allow changes at any time, for any reason.

    The biggest point is that your company HR department has to adopt the changes. The forecast from the articles was that companies will start doing so in mid January when more details and clarification comes out.

    https://www.marketwatch.com/story/covid-relief-bill-will-let-fsa-money-roll-over-into-2021-a-win-for-parents-and-those-with-live-in-elderly-loved-ones-11608825806

    https://www.natlawreview.com/article/year-end-budget-bill-provides-welcome-rules-flexible-spending-accounts

    1. Charlz C

      Thanks for sharing, Ben W.

  36. KH

    Following

  37. Vivean Martinez

    I am following too. Lost so much money for daycare that didn’t use.

  38. BK

    Following this thread. Same boat.

  39. Wendy

    I too have money stuck in my DCA. However, I was laid off in September. And without summer camp in 2020, I wasn’t able to use the $. Hoping I can put it toward the 2021 summer camp! Anyone have any update? Thanks

  40. Ben W

    Bottom Line: Talk to your HR and benefits department. While the bill allows for many different options, it is up to your HR/Benefits department on what they choose to implement. The law unfortunately doesn’t force any changes.
    As an example, at my company, they recently announced the following changes:
    For 2020 and 2021 – Unlimited rollover into the next year for both dependent care and FSA accounts
    For 2021 – Dependent Care contributions can change at any time in the year (no life event required).
    However, they didn’t allow us to make any flexible spending changes in 2021. Basically, if you put too much, you can roll it to next year, but as a regular year, if you didn’t put enough, nothing you can do.

    Good luck to everyone that has money ‘stuck’! Be that squeaky wheel to promote change!

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