Let’s take a closer look at FSAs (Flexible Spending Accounts) since some of the FSA rules recently changed to help more workers due to the Covid-19 pandemic.
FSAs enable employees to save on health costs by allowing employees to defer their own money on a pretax basis to pay for expenses not covered by their health insurance plan, like co-payments, deductibles, and eyeglasses. Workers are only eligible for an FSA if their employer offers health plans and FSAs.
As an employer, your company has the option to contribute to employee FSAs based on how much the employee contributes. An employer may contribute up to $500, regardless of whether or not the employee contributes to the FSA themselves. Above $500, employers may only make a dollar-for-dollar match to the employee’s contribution. However, the combined total contributions cannot exceed the annual IRS limit, which is $2,750.
Here is where the confusion comes in. FSAs were previously “use it or lose it” accounts where employees needed to spend the funds in their healthcare FSA within the plan year. For employees, this has always been a big downside to FSAs. For example, if they contributed $1,000 to an FSA, but only spent $800 during the calendar year, they lost $200.
To encourage FSA participation, in 2005 the IRS started authorizing employers to offer a grace period of 2-½ months after the end of the plan year to spend funds left in their accounts.
Given the Covid-19 pandemic, the IRS is trying to provide additional worker financial relief by permitting companies to allow employees to carry over as much as $550 (20% of the maximum contribution of $2,750) into the following year. Employees that carry over any money can still save up to an additional $2,750.
Please keep in mind that companies have the option to offer employees the ability to carryovers funds. This is not mandatory.
Maximizing Your Money
Here are a few tips to maximize your FSA:
- Whether a person is single or married; the FSA limit applies to individual accounts. Therefore, a married couple could each participate in an FSA, allowing both spouses to contribute $2,750 for a combined total of $5,500 in benefits.
- Know the specifics of what are “qualified medical expenses.” In addition to the basic deductibles, co-payments and prescriptions, some plans cover childcare, first-aid supplies, over-the-counter medicines, sunscreen and more.
- If your company has not implemented the new carryover option, you can still do so.
- Depending on your situation, you may be carrying over the full $550. Therefore, you might want to consider lowering your contribution for the remainder of this year or in 2022. It’s worth analyzing your expected qualified expenditures to figure it out.
More FSA flexibility is a win-win for employers, employees and our economy. With more employee FSA participation, the small administrative FSA fees are less than employers would be paying for payroll taxes.
Do you need advice about your FSA offering? The PT Business Solutions team is here to help you sort through your options and create a plan that is right for your company and employees.