Apr 15, 2020
As your clients respond to COVID-19, you may get questions on how employees’ pre-tax benefits may be affected. In this article, we feature some common FAQs.
What happens to the flexible spending account (FSA) of employees who are not receiving a paycheck and, therefore, not having deductions taken?
If the employee was terminated, it’s no different than other terminations, whether voluntary or involuntary. The employee may be eligible to elect COBRA depending on the size of the business and the type of benefit offered. Otherwise, they can submit claims for expenses incurred through the date their coverage ends until the end of the plan’s run-out period. For terminated employees, the end of the run-out period is typically based on their termination date, not the end of the plan year.
If the employees are brought back to work soon, they may be on unpaid leave or furloughed. Your plan document should explain if these employees remain benefit-eligible. If so, uniform coverage rules apply, and employees will have access to their full health FSA election, not just the amount contributed so far.
Can we refund what employees have contributed to their commuter, dependent care account (DCA), or health FSA?
Money is tight for many employees who are experiencing reduced hours, decreased tips, or no work at all. But the IRS does not allow a refund of FSA contributions. To date, there has been no new guidance about COVID-19 to change this position.
Employees can still submit eligible expenses for reimbursement. Also, DCA and commuter participants can reduce future deductions to $0. DCA reductions can reflect changes in cost, coverage, or provider. For commuter accounts, there are no restrictions on when a reduction may be made if it’s for the future. While these steps may not provide cash as quickly as can a refund, they can still help employees with their cash flow during this time.
Health FSA participants can only change their elections and reduce or eliminate contributions if they experience a permitted election change event. COVID-19 does not constitute a permitted event, but employees may be able to change their health FSA election if they’ve experienced a change in employment status resulting in a loss of eligibility under the plan as a result (e.g. full-time to part-time status or unpaid leave). The same rules apply to refunding previously contributed funds to a health FSA.
Can employees transfer their transit contributions to a parking account?
Some mass transit systems are limiting service to weekends only, so employees need to drive to work instead. Unfortunately, funds in a transit account can’t be used to cover parking expenses. Once the money is deposited into a parking or transit account, it can’t be used for anything other than qualified expenses for that type of account. Future deductions can be reduced to zero and funds in the account roll over from year to year so the contributions in the transit account will be available once the transit systems are back to normal.
Can employees elect a DCA if they didn’t have one before?
With schools closed, employees may need to make childcare arrangements so they can continue to work. However, employees who weren’t previously enrolled in a DCA can’t enroll now because they need childcare. A new DCA enrollment can only happen mid-year when a permitted election change event occurs, such as the birth of a child.
DCA contributions can be changed at any time during the plan year due to a change in cost, coverage, or provider.
Employees who are enrolled in the DCA can change their election if they now have different childcare needs. If a spouse is now home to care for the children, they can reduce their election. If they went from needing after school care to full daycare, they can increase their election.
