Coronavirus and pretax savings: If you can't use it and might lose it, here's what to do

If you’re worried about losing all those pretax dollars you saved in a flexible spending account this year, relief may be in sight, even if COVID-19 keeps you from visiting the doctor or putting your kids in day care.

FSAs allow employees to set aside money for medical and child care expenses. It’s a careful calculation that allows them to pay for essential care while lowering their taxable income. Like many other aspects of daily life, the coronavirus pandemic is upending those plans.

By mid-April, at least 30 states had placed non-emergency medical and dental visits on hold to contain the spread of COVID-19. While some states have since allowed elective medicare to resume, consumers may be wary and opt to delay procedures. Day care centers in eight states are closed except to children of essential workers as of mid-May, while many others are now slowly reopening or are under restrictions that limit capacity.

If people fail to claim all of the dollars set aside in those accounts by a certain date – typically a few months after the end of a calendar year – they forfeit the money, and the unused funds go to their employers, who are in charge of administering the accounts.

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Thanks to a federal coronavirus relief package and new rules from the IRS, you may not have to “use it or lose it” when it comes to those saved, pretax dollars. On May 12, the tax agency said it would provide more options for FSAs, including the chance for employees to readjust their contributions.

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U.S. representatives from Washington state introduced a  bill in Congress that would allow people to roll over their 2020 contributions into 2021, arguing that consumers need flexibility amid the crisis. But for now, the “use it or lose it” rule is in effect.

“We have circumstances now that we couldn’t have expected,” says David Speier, managing director of benefits accounts at Willis Towers Watson. “These are new events that should allow people to rethink what they contribute, whether that’s dependent care or a health savings account.”

Here’s what to know about managing your pretax spending accounts during the pandemic:

Health FSAs

Even before the coronavirus swept the globe, Americans weren’t experts at efficiently handling their health FSAs, which allow workers to set aside as much as $2,750 in 2020. The typical user forfeited about $263 in 2019, up from $159 the previous year, according to a study from health savings account company Lively.

While medical offices were shuttered to all but emergency treatments in many states, consumer spending on health care plunged 18% in the first quarter, according to data from the Commerce Department. That may put even more dollars at risk of being forfeited than in a typical year. Some changes from the IRS and the Coronavirus Aid, Relief and Economic Security Act could help you avoid this.

•  The IRS allows employers to reopen their flexible spending accounts. This would allow workers to reduce the amount they set aside. Typically, employees are given one enrollment period in the fall to set aside these dollars for the coming year. There’s a catch: The IRS says it’s up to the employer to reopen FSAs.

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•  There is more time to claim reimbursements. Employers can allow employees to tap their unused 2019 health FSA money on health care costs incurred through the end of 2020, according to the new IRS rules. That may help some consumers who weren’t able to use all their 2019 funds by the end of their company’s grace period in early 2020, which is typically in mid-March – when the pandemic hit the USA.

•  There are more ways to spend your health FSA dollars. The Coronavirus Aid, Relief and Economic Security Act includes a few tweaks to what consumers can buy with their health FSA dollars. Consumers can use the money to buy over-the-counter drugs without a prescription, as well as feminine hygiene products such as tampons and pads.

“The IRS is trying to create more flexibility,” says Shobin Uralil, co-founder and COO of Lively. “The biggest piece of advice is for employees to ask their employers how their plans are designed to determine whether these changes will take place.”

Employees should be on the lookout for communication from their employers about these plans reopening for new elections, says Speier of Willis Towers Watson.

If you are concerned about spending your dollars, consider taking advantage of telehealth services, which are eligible for reimbursement through FSAs, Uralil recommends.

Dependent care accounts

The IRS has relaxed the rules for these accounts, which allow parents of children younger than 13 to set aside as much as $5,000 to pay for day care, after- or before-school care, summer camps or babysitting. While many child care centers are shuttered – and parents working from home – families may be spending much less than they expected on these expenses.

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The new IRS rules allow employers to reopen enrollment for these plans. In that case, parents could reduce the amount they set aside in these accounts, for instance. But the same catch applies as with the health FSAs: It’s up to your employer to make this option available.

Pretax commuting dollars

Don’t forget about pretax plans for commuting expenses, which your employer may offer to help reduce the cost of parking, trains, subways and other commuting costs – expenses that fewer workers are incurring since many employers asked their workers to telecommute amid the pandemic.

These plans don’t have a “use it or lose it” rule, and the money is deducted from your paycheck on a monthly basis. In this case, it’s up to the worker to ask the employer to halt the deductions. Otherwise, you may lose that money.

“If you aren’t parking at work, don’t forget to shut off your commuter benefits,” Speier says. “If you’ve already paid the parking lot, it’s pretty much gone.”

Aimee Picchi is a business journalist whose work appears in publications including USA TODAY, CBS News and Consumer Reports. She spent almost a decade covering tech and media for Bloomberg News. You can find her on Twitter at @aimeepicchi.


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