In addition to health insurance eligibility, family status changes can impact consumer-directed healthcare accounts. Here’s how mid-year status changes affect FSA and Dependent Care accounts.
Can I change my health FSA contributions?
Employees may choose FSA participation during open enrollment. This includes deciding on an annual contribution amount up to the IRS-mandated maximum.
Health FSA accounts are used to pay for qualified medical expenses incurred by the participant and their tax dependents. If the FSA participant’s family status changes during the year, they may think about changing their annual contribution amount.
Increasing FSA Contributions
The maximum annual FSA contribution limit set by the IRS is the same regardless of family status. If a single person elects the maximum contribution, they cannot increase it because of a family status change such as getting married, giving birth, or adopting. However, if they are contributing less than the maximum, their plan may permit them to increase their contribution in response to a change in family status.
Unfortunately, experiencing more healthcare expenses than expected does not qualify FSA account holders to make a change during the plan year. They must wait until the next plan year to increase their annual contribution.
Decreasing FSA Contributions
An employee may want to decrease their annual contributions in response to divorce, spousal death, or a child aging out of dependency. Some plans allow employees to lower their annual election amount in response to family status changes like these. Check your Summary Plan Description (SPD) or with your benefits representative for your plan’s provisions.
What about Dependent Care FSAs?
Dependent Care FSAs (DCFSAs) help parents save taxes on expenses for the care of dependent children (or other dependents, such as elderly parents, who cannot care for themselves). Like health FSAs, dependent care FSAs have limits but work differently. Single parents and couples filing jointly may set aside up to $5,000 annually. Married parents who file taxes separately may contribute up to $2,500 each.
Some plans allow Dependent Care FSA enrollment mid-year in response to birth, adoption, or a change in circumstances that affects the need for paid child care.
Increasing Dependent Care FSA Contributions
If contributing less than the annual maximum, Dependent Care FSA participants may be able to increase their contributions under certain circumstances. For example, an employee may pay $3,600 a year for home-based daycare. After the caregiver retires and closes down, they move to a childcare center that charges $4,800 a year. Their plan may allow them to increase their contribution in response to this increase in costs.
The Bottom Line
Making a change in response to eligible revisions in family status or other circumstances can help you maximize the benefits of these tax-advantaged accounts or, conversely, avoid forfeiting unused funds.
If your family status changes or you experience a change in circumstances, check with your HR or benefits administrator about whether you qualify to make a corresponding change in your health or dependent care FSA.
DataPath Administrative Services has provided comprehensive third-party employee benefits administration and compliance services to Arkansas employers since 1996. Please enter your email (above right) to receive notifications about new blog articles as they are published.