With the change to remote work and the closure of day care facilities, many employees will no longer be able to use funds in a Dependent Care FSA. A Dependent Care FSA allows an employee to set aside up to $5,000, pre-tax, to pay eligible dependent day care expenses. An expense is eligible for reimbursement if the expense is for care for a qualified individual and the expense is incurred in order for the employee (and spouse) to work or look for work.
Section 125 of the Internal Revenue Code requires an employee’s pre-tax contribution to a Dependent Care FSA be set for the entire year. This means the Dependent Care FSA election may not be changed unless there is an event recognized by the IRS and the employer’s plan document allowing a mid-year change.
During the COVID-19 pandemic, many employees are no longer using dependent day care facilities. Either the facility has closed, the employee is forced to stay-at-home, or the employee is working from home and does not need the care for the child. Employees may question if they can stop their Dependent Care FSA contributions. As of the writing of this blog post, the IRS has not issued relief to address this issue.
It is our understanding that some of the events taking place now would be recognized by the IRS as allowing a change to a Dependent Care FSA election. Employers who want to allow mid-year changes should be sure to check their plan documents to be sure the document also allows a change.
The IRS would recognize a mid-year change to a Dependent Care FSA election for (a) change in the care provider (day care to parent), (b) reduction in work schedule (parent now at home and not eligible to participate in a Dependent Care FSA), and (c) change in cost of provider (provider is closed so fee goes to $0). If permitted in the plan document, the employer could allow an employee to stop future contributions to the Dependent Care FSA.
If an employee does stop contributing to a Dependent Care FSA, the employee will not be able to start contributing again until the next open enrollment for the following plan year. The employee could not just start contributing again when COVID-19 situation resolves and the employee goes back to regular in-office work with a need for day care facilities. There is also no IRS-recognized way to “undo” amounts already contributed to a Dependent Care FSA; the employer would not be able to give back to the employee contributions already made.
It is possible that the IRS will recognize the problems employees will be facing with using Dependent Care FSA funds in light of COVID-19 and address matters in future guidance.