Unused Dependent Care FSA Funds

AT A GLANCE

• IRS released Information Letter 2020-0023 confirming that unused Dependent Care FSA funds cannot be refunded to the participant

Unused Funds Cannot be Refunded

In IRS Information Letter 2020-0023, the IRS responded to a request from a participant who had stopped making contributions to her dependent care FSA under the COVID-19 relief available to Section 125 cafeteria plans and asked whether any exception would allow a refund of unreimbursed amounts. In response, the IRS explained that while IRS Notice 2020-29 permits Section 125 cafeteria plans to be amended to allow participants to make certain midyear election changes, the relief does not modify the rule that an employee cannot receive amounts from a Dependent Care FSA other than as reimbursement for dependent care expenses.

While unused amounts cannot be refunded, the existing regulations do permit Dependent Care FSAs to offer a grace period. A grace period allows participants to spend unused funds during the 2.5 month (75 day) period following the end of the plan year. Any amounts remaining at the end of the grace period are forfeited. Adding a grace period requires a plan amendment, so employers with questions should consult their benefits adviser.

Next Steps

It’s likely that COVID-19s impact on child care will continue into the new year. It may be helpful to remind participants, many who may be in their open enrollment window, to keep that in mind when making elections for the upcoming plan year. As of now, the relief available under IRS Notice 2020-29 expires on December 31, 2020, and there is no guarantee that similar relief to permit midyear election changes will be available in 2021.

Thank you for choosing Paylocity as your Payroll Tax and HCM partner. This information is provided as a courtesy, may change and is not intended as legal or tax guidance. Employers with questions or concerns outside the scope of a Payroll Service Provider are encouraged to seek the advice of a qualified CPA, Tax Attorney or Advisor.