Proactively placing your money in a tax-advantaged account like a dependent care FSA, only to watch those funds be flushed down the proverbial toilet? Yep, that’s 2020 for you. But there are some dependent care FSA rules to know that can help you from losing that pre-tax money.
The loss of tucked-away funds is a prospect some moms and dads face this year if they contributed to the federal Dependent Care Assistance Program, or DCAP. These workplace “accounts” — more commonly known as dependent care flex spending account or flexible spending arrangement (FSA) — are supposed to be a way for parents to deduct a portion of their income from federal tax in order to offset the cost of child care.
But with many parents working from home this year and more than a few daycare facilities closed, some dependent care FSA account balances have just, well, stayed there. Barring any regulatory changes before the end of the year, those dollars are forfeited if left unspent by New Year’s.
If that sounds exceedingly unfair, it’s because DCAP funds aren’t like a traditional bank account, where you actually own the assets, according to Jennifer Berman, CEO of Pikesvile, Maryland-based MZQ Consulting. Rather, it’s an agreement between you and your employer.
“When you put money in a dependent care account, you’re saying, ‘I’m going to forgo my right to what would otherwise be taxable compensation so I can access the funds pre-tax,’” says Berman, whose firm specializes in benefits compliance.
Under IRS rules, employees filing a joint return can typically set aside up to $5,000 of DCAP funds each year; single filers can exclude half that amount. Given the staggering cost of full-time daycare, a lot of parents plow through those funds fairly quickly. But in this train wreck of a year, that money isn’t moving as fast.
Spending Down Your Dependent Care FSA Funds
With a month and a half to go before we slam the door on 2020 (and, really, who isn’t counting down the days?), Berman believes there’s still a possibility that the IRS will relax the rules and let parents roll over their balance to next year. “Nobody’s trying to take money out of parents’ hands,” she says.
But a holiday gift from the feds in the form of a last-minute rule change isn’t guaranteed, either. Several members of Congress have been asking regulators to relent for months, to no avail.
In the meantime, what are parents to do if they’re likely to have a balance left over? Unfortunately, you can’t simply pull the money out and pay the tax on it, says Berman.
That makes it all the more important to find expenses for which you can allocate those pre-tax dollars — perhaps ones you didn’t know were eligible.
The purpose of DCAP is to help parents more easily manage child care expenses incurred because of employment. That’s not limited to daycare centers and summer camps. In many cases, for instance, you can also draw on your dependent care account to pay a babysitter who makes sure your son or daughter under the age of 13 logs onto their virtual classes while you both work or look for a new position. You can also tap the accounts if you hire someone to look after older dependents who can’t care for themselves.
The key question is whether you’re hiring someone primarily to care for your child or to provide educational services. As a general rule, the latter isn’t allowed. Preschool tuition is eligible, as are before- and after-school daycare programs. But the tutor you hired to help with your daughter’s math, or the costs to join a neighborhood learning pod? You’ll have to pay those out of pocket.
Dependent Care FSA Rules: What to Do With Leftover Funds?
If it’s looking like you might not go through all your funds, now’s a good time to investigate whether there were any eligible expenses from earlier in the year you might have missed. Perhaps there was a summer camp you threw on your American Express card for which you can now apply for reimbursement.
Keep in mind, too, that you may have greater flexibility when it comes to stopping your DCAP payroll deductions this year. Ordinarily, you’re only allowed to make changes to your deferral during the open enrollment period, but changes to your child care arrangement — say, your care provider changed or your child stops going to daycare altogether — are an exception. So even if there’s no way to avoid losing the funds already in your account, you might be able to stop the bleeding.