Please ensure Javascript is enabled for purposes of website accessibility

Should You Change Your Flexible Spending Account Election Due to COVID-19?

By Maurie Backman - May 15, 2020 at 8:54AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

You now get more leeway with your FSA. Here's when it pays to capitalize on it.

Each year, many workers take advantage of the opportunity to allocate money to a health or dependent care flexible spending account, or FSA. With the health version, you set aside funds on a pre-tax basis to pay for expenses like prescription medications, doctor visits, orthodontics, and eyeglasses. With the dependent-care version, you set aside funds on a pre-tax basis to pay for child care. That includes day care centers, after-school care, and summer camp.

The problem with FSAs is that despite the name, they're actually somewhat inflexible -- you're required to commit to an annual contribution for your plan during your employer's benefits-enrollment period and you must either use up that entire balance during your plan year or otherwise risk forfeiting some of it. (In some cases, however, you can carry a portion of your unused balance into the following plan year and use it early on.) Similarly, if you underfund your FSA and then realize during your plan year that your expenses are higher than anticipated, you can't increase your pre-tax contribution to that plan.

That is, until now.

Man at laptop using calculator

IMAGE SOURCE: GETTY IMAGES.

Because of the COVID-19 crisis, the IRS is now allowing FSA participants to change their contributions midyear. And that's an option you may want to take advantage of.

Should you change your FSA election?

Typically, FSAs make you assume the burden of predicting your healthcare and child care expenses in advance. But due to the circumstances surrounding the pandemic, many participants are now in a position where they have either too much or too little money in their accounts. As such, the IRS is allowing for midyear changes, which means you can either add funds to your FSA or reduce the amount you contribute.

Why might you make a change? Imagine the bulk of your annual child care expense comes in the form of summer camp, so you allocated $5,000 to your dependent-care FSA last year (the maximum allowable), thinking you'd spend $4,000 of it on camp alone. If your children's camp doesn't open this year because of social distancing mandates, you won't manage to use up your entire dependent-care FSA balance, thereby putting yourself at risk of forfeiting those funds. In this scenario, reducing your FSA election makes sense.

Similarly, maybe you were planning on an elective health procedure this year that's FSA-eligible, and as such, put $2,500 into that account. If that procedure, which would've cost you $1,500 out of pocket, is now postponed indefinitely due to the pandemic, you may want to reduce your FSA election to avoid potentially having to forfeit that money.

Then again, you may want to boost your FSA contributions. If you normally have an older family member who provides child care, but that family member doesn't feel safe doing so because of the pandemic, then you may need to find a day care center that's open instead. In this scenario, your child care costs are increasing, which means you may want to allocate more funds for dependent care.

In addition, healthcare FSAs now allow you to use your funds to pay for over-the-counter medications -- a change from pre-pandemic times. If you take a lot of over-the-counter pills, you may want to put a little more money into your FSA to reap the extra tax savings.

Either way, it pays to take a close look at your FSA election and see if changes need to be made. Keep in mind that your employer may only allow you to make a single adjustment this year, so weigh your options carefully before locking in your changes.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
403%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/16/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.