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remedy options for forfeited dependent care FSA money


tax1111
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TP changed her job and forgot to submit reimbursement claims in time for previous employer's dependent care FSA so about $3000 in the plan was forfeited.
She said she heard that IRS has some remedy options that she can get compensated from tax perspective on the forfeited money.
Does anyone hear about this?
Thanks!

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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."

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On 4/29/2022 at 2:59 PM, cbslee said:

A grace period allows participants to spend unused funds during the 2.5 month (75 day) period following the end of the plan year.

I agree that unused funds cannot be refunded, but the Consolidated Appropriations Act 2021 allows plans to extend the grace period to 12 months for plan years 2020 and 2021.  They can either extend the claims period or allow carry over of the unused funds. They can also allow the carried over funds to be used for dependents who are age 13 (normally only care for those under 13 or disabled would qualify). See Notice 2021-15 and Notice 2021-26

The plan must still be amended, so this probably won't help this TP, but they can check with the administrator.

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