How to get mid-year relief
on dependent cost
The full force and fury of the coronavirus pandemic has prompted the Internal Revenue Service to bend on regulations regarding tax-favored dependent care accounts.
The popular workplace plans, known as dependent-care flexible spending accounts, allow employees of participating companies to use up to $5,000 of pretax earnings to pay for expenses, such as daycare, preschool, before and after school programs, and summer camps. It covers costs for children under age 13.
These accounts also can pay costs for older dependents who can’t care for themselves.
Normally, participants can’t revise contributions in these accounts for an entire year, unless there’s been a major change in family status, such as divorce, death or having a child.
But in mid-May, the IRS said it would allow account holders to add, drop or alter some of these benefits around mid-year. The IRS ruling said the changes were made to address “unanticipated changes in expenses” because of COVID-19.
For example, many account holders have been laid off and do not need daycare services. The IRS now allows changes in the spending accounts because of changes in employment status, reductions in hours and substantial changes in employer benefits.
As with anything regarding the IRS, there is one big caveat: Employers must approve the change, though businesses were the ones lobbying the IRS to grant more flexibility.
Money in dependent care accounts typically can be used for a variety of expenses, though most of those programs and camps have been no-go’s since March.
The funds can’t be used to pay one dependent, such as a teenager, to take care of a brother or sister under 13, but they could be used to hire a neighbor’s child to do so, according to a Wall Street Journal report on the IRS changes.
Here’s how the flexible accounts work: Workers typically make an annual election in the fall to contribute pretax pay to the account. That amount is deducted from paychecks over the course of the year.
As employees submit receipts for eligible expenses, the employer reimburses the costs up to the amount the employee designated.
Now, with rules relaxed, if you designated $2,500 for a dependent care account for 2020, or $5,000 if married and filing jointly, the contribution can be lowered or eliminated.
All money in a dependent care account has to be spent before year end. This may be a temporary opportunity to make adjustments, so contact your employer’s human resources department about new forms to submit.
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