While the IRS published relief that sponsors could give to participants in their cafeteria plans in Notice 2020-29 for 2020 plan years, and the Congress provided additional relief in §214 of the Taxpayer Certainty and Disaster Relief Act of 2020, not all situations are eligible for relief that will make the participant whole.  One such situation was discussed in IRS Information Letter 2020-0027.[1]

The letter was written to respond to a constituent of Rep. Madeleine Dean of Pennsylvania who found themselves out funds that had been directed by them into a dependent care flexible spending account in their employer’s cafeteria plan.

The memorandum notes that Rep. Dean’s constituent:

…explained that he will have unused amounts in his dependent care flexible spending arrangement (FSA) under a Section 125 cafeteria plan because his children did not attend summer camp due to COVID-19 and he does not expect to have additional childcare expenses during 2020.[2]

Rep. Dean’s constituent was asking if the unused funds could be repaid to him, noting that he was aware that relief had been granted during the year to allow the suspension of amounts being deferred into the program.

The IRS had to inform the constituent that the relief he sought wasn’t available.  The letter noted:

As * * * noted, the IRS provided relief in Notice 2020-29 to allow, but not require, an employer to amend a Section 125 cafeteria plan to give employees increased flexibility to make mid-year election changes to their dependent care FSAs during 2020 on a prospective basis. However, this relief does not modify the rule that an employee's contributions to a dependent care FSA cannot be returned other than as reimbursements for dependent care expenses. This also applies to contributions the employee made before a mid-year election change. See Proposed Treas. Reg. § 1.125-5(i)(3).[3]

The letter also noted that any payments had to be limited to reimbursement of dependent care expenses that are employment related.[4]  Presumably the author was concerned about the nature of the camp payments and if they truly would meet the requirements for employment related dependent care—they might, but then again they might not.

This letter, while released on December 31, 2020 in redacted form, was sent to Rep. Dean in September.  Since then Congress did provide relief that might (or might not) help in this situation—but it would not result in a refund.

Section 214 of the Taxpayer Certainty and Disaster Relief Act of 2020, enacted as part of the Consolidated Appropriations Act, 2021, allows cafeteria plans to be modified to allow carryover of unused health care or dependent care flexible spending account balances into the following year for plan years ending in 2020 or 2021.  As well, the Taxpayer Certainty and Disaster Relief Act of 2020 §214(d)(1) and (2) provides potential relief in cases where the child would “age out” of the dependent care benefit in the following year, giving limited relief from the age restriction for those unused funds.

[1] INFO 2020-0027, December 31, 2020, https://www.irs.gov/pub/irs-wd/20-0027.pdf (retrieved February 6, 2021)

[2] INFO 2020-0027, December 31, 2020

[3] INFO 2020-0027, December 31, 2020

[4] INFO 2020-0027, December 31, 2020