How Parents Can Use Their FSA Funds Before They Lose Them to Pandemic Uncertainty

As if parents didn't have enough reasons to be stressed during the pandemic, their FSA money may go unused. Here's what experts suggest.

Kimberly Palmer is a personal finance expert at NerdWallet. She's also a mother of three. Last year, when her husband's employer had open enrollment, the couple signed up for a dependent care flexible spending account (DCFSA). It was a no-brainer.

FSAs allow caregivers to put aside up to $5,000 of pretax income to cover child care expenses. The couple spends more than that on child care, but it made a dent.

Then the pandemic hit. The after school programs Palmer's children attended got canceled. Summer camp did, too. Palmer's husband froze deductions in April, but they have $400 sitting in the account, and they aren't sure if they'll be able to use it.

"A lot of parents have hundreds of dollars, if not thousands, on the line here, and they are potentially are going to lose a lot of money," says Palmer. "A lot of parents, including me, are very frustrated by this."

Palmer, along with Lauren Lippincott, a manager at Benefit Resource, Inc., discuss what FSA funds can be used on, how caregivers may be able to salvage their money, and the legislation currently sitting in the Senate.

An FSA Primer

FSA funds are deducted from a caregiver's paycheck. Employers decide how much you can put away. The legal maximum is $5,000 per year per household (Palmer's family's FSA funds come entirely out of her husband's check, but others may elect to split it between partners.) The caregiver pays for care and then submits a detailed receipt to get reimbursed. The money set aside is not subject to federal income tax, which is how the savings happen.

"For example, if you are maxing out your $5,000 per year into a dependent care FSA and your income is taxed at 30 percent, you would save $1,500," says Lippincott.

The funds can be used on a variety of different types of care for children under 13, as well as spouses and older family members who are unable to care for themselves. You can learn more about qualifying persons through the IRS here.

Babysitters, nannies, after-school programs, and summer camps qualify—so long as it's during hours when parents are working or seeking employment.

FSA During COVID-19

The IRS has provided some flexibility during COVID-19. Typically, FSA account holders forfeit unused funds at the end of the calendar year. This year, the IRS has allowed up to $550 to roll over, but that's not guaranteed for everyone. "The implementation will vary by employer," says Palmer.

Some employers may allow caregivers to halt contributions. Palmer's family did that in April, but they can only use the funds on child care expenses up until that point. In other words, if they sign one of her children up for daycare, they would have to start contributing again to pay for it rather than using the $400 already in the account.

Unemployment has also reached levels not seen for a century during the pandemic. When caregivers lose their jobs the contributions stop, and you typically lose access to the funds either right away or at the end of the month. “You’ll want to ask your employer directly,” says Palmer.

Some people may want to withdraw the funds for other expenses, like rent or food, while they search for work and care for their children themselves. That isn't possible. "The IRS does not allow for refunds to be returned to participants," says Lippincott.

Options for Caregivers

Caregivers are stressed right now. Lippincott has changed hers four times but has been fortunate to be able to use her FSA funds. Palmer wants to be able to use her funds; Though $400 may not seem like much in the middle of a public health and economic crisis, every little bit helps, particularly as parents try to navigate financial and employment insecurity.

"It would be such a relief [to be able to use them]," says Palmer. "Right now, with so much uncertainty and financial anxiety, the thought of losing $400 makes me cringe. I hate the thought of losing hundreds of dollars that could be in our emergency fund. I hope we have the option to roll it over because hopefully next year we have some child care expenses."

As a financial expert and empathetic parent, Palmer advises people to speak with their employer (something she reminded her husband to do shortly before our interview). "Ask if they have made more choices available," she says.

You also may be able to enroll your children in a socially-distant after-school program or hire a babysitter to watch them Zoom into school while you work remotely. If you feel safe enough, it may relieve some stress.

Legislation Is on the Table

The Child Care for Economic Recovery Act (H.R. 7327) would allow dependent care FSA funds to be carried over from the 2020 plan year into 2021. It would also raise the current dependent care FSA annual limit from $5,000 to $10,500 and have the limit increase with inflation each year. The House of Representatives passed the bill in July, and it's waiting on a vote in the Senate.

Lippincott suggests calling your Senator to advocate for its passage. "I would recommend they get their voices heard—that they have money in their account because their expenses changed, and they need it to roll over," she says.

If the bill passes, it will help alleviate financial stress on parents and could also allow them to put money into the struggling economy or make ends meet.

"Parents would have the ability to claim the full potential of their benefit if they did not forfeit the money," says Lippincott. "This would free up money for parents to spend elsewhere and use for just overall household expenses or bills or expenses for their children."