When the COVID-19 pandemic first exploded in the US back in March, the majority of the country shut down in an attempt to slow the spread of the disease. These business closures had many long-term effects that were hard to anticipate initially. One of these was the effect on funds set aside in 125 plans.
If you are like me, there is a good chance you funded your 125 cafeteria plan through your employer at the end of 2019.
Most likely, you looked at your anticipated medical expenses and childcare and elected that amount, or maybe a little more for the year to come. Like many other Americans, I maxed out my dependent care portion knowing that my daughter’s preschool would more than exceed the allowed $5,000. I also opted for the 125 medical account to cover my family’s medical, dental, and any other minor medical-related expenses that might come up as the year passed.
When making 125 plan elections, it is clear it is a “use it or lose it” election – meaning you must use the funds within the allotted time frame or you will lose them. So, I am always conservative when I make my elections. Fast forward 2.5 months, though, and bam! Welcome to the world of COVID.
Suddenly, my daughter’s preschool was closed, my sons’ summer camps were cancelled, dentist offices were closed, and doctors’ offices recommended waiting on any non-urgent appointments. Now, I find myself wondering what will happen to all of this money set aside that I clearly will not use this year.
Luckily, the IRS has looked at these 125 plans and realized that this is a big problem for a lot of people.
Because of this, there is some relief! Under IRS Notice 2020-29, the IRS is allowing employees to make certain prospective mid-year elections changes for employer-sponsored health coverage, health FSAs and dependent care assistant programs during the calendar year that the plan was elected. The one caveat is that it is at the employers’ discretion whether they want to allow the changes to be made.
The notice allows for an employer to amend one or more of its 125 cafeteria plans to allow employees to revoke an election, make a new election, or decrease or increase an existing election regarding a health FSA or dependent care assistance program on a prospective basis. Medical 125 accounts have also increased the allowable rollover from $500 to $550, meaning that if after the year ends, you have $550 or less in your medical FSA, you may roll it into 2021 for reimbursement. Employers are now also allowed to extend the claims period for plans ending in 2020. Additionally, in March, the IRS relaxed the rules for what can be reimbursed under the FSA accounts to include over-the-counter medications and feminine care products.
Now that you have this information regarding your 125 plans, what’s next?
The first step is to reach out to your employer and ask them if they are allowing amendments to their 125 plans. If the answer is yes, it’s time to create a new budget and realistically estimate what you will spend.
You can’t take out the money you already contributed, but you can stop it now and you can budget for how to use it over the next 6-7 months. If you have too much in your 125 medical account at year-end, keep in mind that you can always stock up on medical supplies. Find out what amount your company allows you to roll over and what the rollover period entails.
Remember this good news: there are options out there! Take advantage of these opportunities so that you do not have to lose your contributions.