IRS Eases Rules on Flexible-Spending Accounts During Pandemic
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What is the main topic discussed in this episode?
Here's your money briefing for Thursday, May 14th. I'm J.R. Whelan for The Wall Street Journal. Millions of Americans set aside money for programs like daycare and summer camp using a pre-tax savings plan called a Flexible Spending Account, or FSA. But now that schools are closed and the kids are staying home, the money going into FSAs through automatic contributions could be more useful elsewhere.
Yes, the IRS is doing what it can within the letter of the law to give people a lot more flexibility. If they thought they were going to be paying for summer camp this summer or after-school care and those things have gone away, they may have money piling up in those accounts, and they were just going to keep putting money in if they hadn't gotten these new rules, this new flexibility from the IRS.
That's Wall Street Journal tax reporter Laura Saunders. Coming up, she'll explain what people can and cannot do with the money in their FSA.
Americans who are making automatic contributions to flexible spending accounts, or FSAs, for their kids or older dependents are getting some relief from the IRS.
What change did the IRS announce for dependent-care FSAs during the pandemic?
Wall Street Journal tax reporter Laura Saunders is with us with details. So Laura, what are the changes the IRS is allowing regarding dependent care FSAs?
What they're doing is they're providing a lot more flexibility. In general, when you elect to put money into a dependent care FSA, you make that decision before the beginning of the year and then you can't change it during the year unless something really big happens like a divorce or a death or a birth or whatever. Now they're saying that you can go back into the account and change your elections and either turn off the election, stop the money you're putting in, or you can make it more or you can make it less. And that's if the company also allows you to do it. But the IRS is giving the company the ability to allow workers to do this.
So the IRS is recognizing that people's lives have been really thrown into upheaval.
How can employees modify dependent-care FSA contributions midyear under the new guidance?
Yes, the IRS is doing what it can within the letter of the law to give people a lot more flexibility. If they thought they were going to be paying for summer camp this summer or after-school care and those things have gone away, they may have money piling up in those accounts and they were just going to keep putting money in if they hadn't gotten these new rules, this new flexibility from the IRS.
So in a year like the one that we're in, can people withdraw the money?
That's not entirely clear, but apparently within the letter of the law, once you put money in, you can't take it out except for reimbursable eligible expenses.
Which types of dependents and expenses are eligible for dependent-care FSA reimbursements?
And so what this allows you to do is to lower the contribution or to turn it off or to raise it if you need to do that.
So there's still a risk of losing the money that's in there.
They could, and it may be hard to get it back, but at least you can stop it from getting to be more.
Is any money put into the FSA taxable?
What steps must employers take for workers to access the new FSA flexibility?
No, it's pre-tax money, and it's pre-tax in a really good way. It comes out with no income taxes and no payroll taxes, either for the employee or the employer. And that's a pretty good deal because payroll taxes are up over 12%.
It seems like opportunities to make changes don't come around very often.
No, they really don't. This is not what the law was set up for, but we're in the middle of a crisis, and the IRS is doing what it can to give people options.
What additional FSA and health‑coverage flexibilities did the IRS provide this year?
Now, do the IRS say that only people who have money set aside for things like daycare or summer camp are eligible to make changes?
Well, it's mainly used for daycare, summer camp, and after-school care. But remember that the dollars in these accounts can be used for care for elderly dependents, like if your mother is your dependent. It could also be used for a disabled child over the age of 13, but who can't care for himself or herself. So there are a range of options. It's just that mostly it has gone for the care of children under age 13.
Can people withdraw money from their dependent-care FSA if care plans change?
Now an employer has to take some steps in order for this flexibility to be available to the employee.
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Chapters
7 chapters
1
What is the main topic discussed in this episode?
0:05–1:16
2
What change did the IRS announce for dependent-care FSAs during the pandemic?
1:16–2:14
3
How can employees modify dependent-care FSA contributions midyear under the new guidance?
2:14–2:55
4
Which types of dependents and expenses are eligible for dependent-care FSA reimbursements?
2:55–3:14
5
What steps must employers take for workers to access the new FSA flexibility?
3:14–3:43
6
What additional FSA and health‑coverage flexibilities did the IRS provide this year?
3:43–4:21
7
Can people withdraw money from their dependent-care FSA if care plans change?
4:21–6:16
Speakers
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