Managing spending accounts during pandemic

Flexible spending plans for health care and dependent care are usually some of the best employee benefits around. But in the time of coronavirus the plans have become a big liability for workers who set aside thousands of dollars to pay for medical and childcare they can’t access.

The plans allow employees to set aside up to $2,750 to cover out-of-pocket health care expenses and up to $5,000 to cover child and elder care expenses. Employees don’t pay federal income, Social Security or Medicare taxes on the money, potentially saving thousands of dollars depending on their tax bracket.

Employers benefit, too, because they don’t have to pay the 7.7 percent employer portion of Social Security and Medicare payroll taxes on the portion of salaries set aside in flexible spending accounts.

But the tax-advantaged accounts include a use-it-orlose-it feature, meaning that employees who don’t use the money earmarked for medical bills or daycare expenses within the year forfeit the funds. So how do you spend the money for after-school care if your children’s school is closed and so is the afterschool program?

And what if you can’t use

up all the health care money you set aside because elective surgeries, non-emergency dental procedures and other types of care were halted this spring and you’re reluctant to re-schedule? The problem is especially vexing for employees whose plan year ends not in December like most, but this spring or summer.

Flexible spending plans are offered by more than eight out of 10 large employers, according to Mercer. Twenty percent of employees participated in health care plans in 2017, contributing an average $1,300. Five percent participated in dependent care programs, allocating an average $3,400, according to Mercer.

Employees participating in their company’s dependent care program and don’t need the money for childcare any longer should consider asking their employers to stop their dependent care contributions, recommended one employment lawyer.

Life event

Most employee benefit plans allow employees to change their dependent care contributions — including putting a stop to paycheck withdrawals — if employees’ circumstances change, such as when schools close or employees shift to working from home, said employment lawyer Jesse Gelsomini who represents management clients at Haynes and Boone in Houston.

“Under most plans that will be a permissible change-in-status event,” he said.

Employees have 30 days to request a change, but most employers are flexible about when the clock started, said Gelsomini, as working from home, which started as a temporary measure, has become more of a long-term solution.

The Internal Revenue Service also issued guidance that allows companies to amend their plans to allow employees to change their dependent care and health care contributions going forward, including dropping employee contributions all together. The change is designed to provide flexibility as employees struggle to cope with the coronavirus, according to the

IRS notice.

But it is only good if your employer chooses to amend its flexible spending plans. And you still must spend the money already put aside in your account.

Hopefully schools will reopen in the fall and you can use the dependent care money you’ve already set aside for after-school care. Or day care, if you head back to the office later this year.

To spend money already set aside for health care spending, participants can use the funds on typical out-of-pocket expenses such as prescriptions, dental work and eyeglasses. But the IRS rules also allow spending on things that might at first glance not sound too health related. That includes transportation cost, including parking and mileage on the drive to the doctor.

The rules have also been amended recently by the Coronavirus Aid, Relief, and Economic Security Act to allow participants to use health care flexible spending funds to pay for over-the-counter medicine such as cold and cough remedies and feminine hygiene products. Keep your receipts and submit them for reimbursement.

Don’t wait. Spend

If you’re still working and you haven’t used all the health care money you elected to set aside at the beginning of the year on out-of-pocket expenses, consider spending it quickly. The entire pot of money is available to use for eligible health care expenses on the first day of the plan year and most plans don’t require departing employees to repay the funds that were not yet collected.

But availability of those committed-but-not-collected funds comes to an abrupt halt if employees leave mid-year, whether they quit or get laid off. And getting the money out you’ve already contributed can turn out to be difficult.

Ask your employer to see if you qualify for a COBRA plan for your flexible spending account.

And then consider spending the money as fast as you can to avoid administrative fees and continuing to pay contributions but on an after-tax basis.

It’s time for new eyeglasses for everyone in the family.