As a result of the Coronavirus crisis there have been a variety of changes in rules and regulations that affect your personal finances. Some of these changes, such as the suspension of the required minimum distribution rules for 2020, or the suspension of loan payments on federal student loans through September of this year, have justifiably received a fair amount of publicity. However, there have been other changes that have not gotten the press they deserve but are just as important. One of the changes you may have missed relates to the IRS guidelines regarding mid-year changes to workplace health plans and flexible spending accounts.
Normally, you are only allowed to make changes to your workplace health plan or your flexible spending accounts once a year during an open enrollment period. Typically, the enrollment period for an employer sponsored health plan or a flexible spending account is sometime in the fall for the next calendar year. The problem is that things change, and as a result, what was good for you in the fall may not be beneficial for you the following year. Particularly, with your flexible spending account, if you don’t properly fund your account, you can lose out on some of the benefits either by underestimating or overestimating your expenses. If you underestimate your expenses, there can be a substantial penalty to you. The key with these flexible spending accounts is that you have to spend the money in your account during the calendar year, or you lose it. Most employers only allow you to carry over $500 to the next year. This means if you withhold $2,000 for the year from your paycheck and deposit that money into your flexible spending account, you must spend $2,000 on qualified expenses in that year. If you only spend $400 during the year and you can only rollover $500, you lose the remaining $1,100 (2,000-400-500). However, because of the new rules, you have an opportunity to make changes. Under the new rules, you can change how much you’re contributing to your flexible spending account. Therefore, for those who need extra cash flow, you can consider stopping your contributions, thus allowing you to increase your take home paycheck. Furthermore, many parents who have been allocating money for childcare services may find that with daycare centers and after school programs closed, they don’t need as much allocated for childcare services as they did before. These individuals can take advantage of the new rules and change their contributions to their flexible spending account.
The new change in the law also allows employees to sign up for an employer’s health insurance if they haven’t previously done so. It also allows workers to add or subtract family members to their current plan, or even switch to a different healthcare plan. Particularly, for those who are on a spouse’s or significant other’s healthcare plan and that person lost their job and their healthcare benefits, this change in the rules can be a lifesaver.
Nothing is easy and there is a caveat that is important. The changes to the healthcare plan and the flexible spending accounts are not automatic; they do require employer approval. I would imagine most employers will choose to implement these rules; however, some may not. If you are affected by these rules and your employer does not allow them, it is a fair conversation for you to have with them as to why not.
If you have a flexible spending account, it is important to relook at your situation and decide if changes are needed. This is a unique opportunity and you should take advantage of it. After all, the money you save ends up in your pocket, exactly where it belongs.
Rick is a fee-only financial advisor. If you would like Rick to respond to your questions, please email Rick at email@example.com.