If you had a flexible spending account (FSA) prior to 2021, you’ve probably heard the phrase “use it or lose it,” meaning that any unused funds you had contributed to your FSA would be forfeited at the end of each year. But, did you know that rule has changed (for now)?
Along with that modification to FSAs, many others will affect you if you are contributing, or will contribute, to an FSA in 2021. This guide will break those changes down for you and help ensure that you’re getting the maximum benefit from your FSA.
Let’s start at the beginning for those who aren’t familiar with FSAs or are a bit hazy on the details.
The Flexible Spending Account (FSA) is a much sought-after benefit in 2021 as people return to doctors and hospitals for treatment they delayed receiving in 2020 because of the pandemic.
An FSA helps take the sting out of paying for medical treatment and dependent care. It’s a special type of account that an employer can offer as an employee benefit (you can’t individually open an FSA). The account is funded with pre-tax earnings, which reduces an employee’s taxable income.
Perhaps the most significant advantage of an FSA is that you won’t pay taxes when you use the funds in your FSA to pay for eligible expenses. So, not only do you get a tax break when you put money into the FSA, you get a second tax break when you spend it.
There are three types of FSAs that employers offer:
Health Care FSA
You can use the money in your FSA to pay for many healthcare expenses that you incur, such as insurance deductibles, medical devices, certain prescription drugs, doctor’s office co-pays, and more. The most you can contribute pre-tax to your account is $2,750 in 2021, which is unchanged from 2020.
Limited Purpose FSA
These FSAs are designed specifically for expenses related to dental and vision care. The annual contribution limit for these accounts is also capped at $2,750.
Dependent Care FSA
Parents and caregivers can use funds in this type of account to pay child care or elder daycare bills. Because of the American Rescue Plan signed into law in March 2021, the contribution limit has been raised to $5,500 for married couples filing jointly or $2,750 for an individual or married person filing separately.
Contribution limits apply to a “plan year,” which could be the renewal date of the company’s group health insurance coverage, not necessarily a calendar year.
Signed into law in December 2020, the Consolidated Appropriations Act, 2021, included temporary changes that offer more options for FSAs this year. Companies are not legally required to make these changes to the FSA plans they offer.
Optional changes in the Act include:
No limits to carrying over funds
The amount of money employees could carry over to the next calendar year was limited to $550. However, the Act allows unlimited funds to be carried over from plan year 2021 to 2022. Dependent Care FSAs, which previously allowed no carryover, also have an unlimited carryover provision in 2021-2022.
Up to a 12-month grace period
For FSAs with a plan year ending in 2021 or 2022, employees can receive up to a 12-month grace period to use contributed funds.
Change contributions during the year
Before the legislative changes, employees could only change their contribution amount if they had a “qualifying life event (marriage, divorce, new child).” With the changes, employees can change their contribution amount at any time, even if they haven’t experienced a qualifying life event.
Former employees can access funds
Generally, employees lose their FSA funds if they leave their job or are laid off. However, employees who stopped participating in their former employer’s FSA plan in 2020 or 2021 can now be given until the end of the plan year, plus a grace period, to spend any funds remaining in their account.
Dependent Care FSA child age limits extended
If an employee enrolled in this type of FSA before January 31, 2020, and their qualifying child turned 13 during the plan year, they can continue to use the plan until their child turns 14 or the 2021 plan year ends.
The flexibility these changes provide means you might not need to worry about losing unused funds. Still, you should check with your HR or benefits department to see if your company has adopted the changes or plans during your current plan year. If your company hasn’t implemented the changes yet, the new law does allow changes to be retroactive.
Your company may offer you two options when you use your FSA funds. The majority of plans provide an FSA debit card you can use when paying for eligible expenses (keep your receipts in case you need to substantiate a charge).
Some plans require an employee to pay eligible expenses upfront and be reimbursed after submitting a claim and receipts.
Though they both help you pay for eligible expenses using pre-tax contributions, there are important differences between a flexible spending account (FSAs) and a health savings account (HSA). Some of these differences include:
If an employer offers an FSA plan, it can be used with any health insurance plan. With an HSA, you must be enrolled in a high-deductible health plan (HDHP).
Regardless of recent tax acts, HSAs have not had an expiration of unused funds in the account. FSAs currently don’t have an expiration date when the employee loses unused funds at this time, but they could revert to “use it or lose it” status if there are new legislative changes.
Your employer legally owns your FSA account, even though you’re contributing to it. Typically, when an employee separates from the company, any unused funds return to the employer. COBRA continuation coverage allows employees to continue using FSA funds if they separate from the employer.
The employee legally owns their HSA account. If you terminate your employment voluntarily or involuntarily, your HSA funds are yours to keep.
[ Related read: HSA vs. FSA: Which is better for your healthcare needs? ]
There have been favorable changes to FSAs in the past twelve months. However, it’s unknown what the future holds. While there is certainly no reason to think FSAs won’t continue to be recognized as an employee benefit, contribution limits and forfeiture provisions might change in 2022. Your HR department and FSA provider should keep you updated on new developments.
Having grown up in upstate New York, Bob Phillips spent over 15 years in the financial services world and has been making freelance writing contributions to blogs and websites since 2007. He resides in North Texas with his wife and Doberman puppy.
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