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

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!

Have a question about dependent care flexible spending accounts or another employee benefit?

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

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Comments (6)

  1. AvatarBen 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?

    Reply
    1. AvatarJennifer 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.

      Reply
  2. AvatarRana

    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?

    Reply
  3. AvatarBen 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.

    Reply
    1. Anne NewhouseAnne 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.

      Reply
  4. AvatarDanielle

    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.

    Reply

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