What is an FSA?
An FSA or Flexible Spending Account is a pre-tax benefit account that you can use to pay for eligible medical, dental, and vision care expenses that aren’t covered by your health insurance plan. You decide how much to contribute to your Healthcare FSA each year, and funds are withdrawn automatically from each paycheck for deposit into your account before taxes are deducted. The total amount you elect to contribute to your Healthcare FSA each year is available on the first day of your plan year.
Is an FSA Right for me?
An FSA is a great way to pay for expenses with pre‐tax dollars. A Healthcare FSA could save you money if you or your dependents:
Consolidated Appropriations Act, 2021
On December 27, 2020, the latest COVID relief bill, the Consolidated Appropriations Act, 2021, was signed into law. The law includes several provisions that provide relief for health and dependent care flexible spending accounts. Employers may, but are not required to, permit the following:
- Carryover of unused funds, with no dollar limit, from a plan year ending in 2020 and/or 2021 to a plan year ending in 2021 and/or 2022; or
- Extension of the grace period to up to 12 months after the end of the plan year for a plan year ending in 2020 and/or 2021.
The above applies to both health and dependent care FSAs.
- Employees who cease participation in a health FSA during the calendar year 2020 or 2021 may continue to receive reimbursements from unused benefits or contributions for claims incurred through the end of the plan year in which such participation ceased (including a grace period if applicable).
- Increase the maximum age (by one year) for certain dependent care beneficiaries who aged out during 2020, and provide additional relief for such dependent care beneficiaries in 2022.
- Prospective modification of election amount for health and dependent care FSAs for a plan year ending in 2021.
As stated above, these provisions are not mandates but are options for employers to consider. Plan amendments must be made by the end of the first calendar year beginning after the end of the plan year in which the amendment is effective (for example, calendar 2020 plan amendments must be adopted on or before December 31, 2021), provided the plan must be operated consistent with the terms of the amendment beginning on its effective date.
FSA Benefits the Employer and Employee
- With an FSA, you elect to have your annual contribution (up to the $2,750 limit set by the IRS) deducted from your paycheck each pay period, in equal installments throughout the year, until you reach the yearly maximum you have specified.
- The amount of your pay that goes into an FSA will not count as taxable income so that you will have immediate tax savings.
- Allows reimbursement of qualifying out-of-pocket medical expenses.
- A Limited Purpose Medical FSA works with a qualified high deductible health plan (HDHP) and Health Savings Account (HSA). A limited FSA only allows reimbursement for vision and dental expenses.
- You receive a reimbursement of dependent care expenses, such as daycare) incurred by eligible dependents.
- The amount of your pay that goes into an FSA will not count as taxable income so that you will have immediate tax savings.
- Qualifying out-of-pocket medical expenses.
- Limited Purpose Medical works with a qualified high deductible health plan (HDHP) and Health Savings Account (HSA). A limited FSA only allows reimbursement for vision and dental expenses.
- Enjoy significant tax savings with pre-tax deductible contributions and tax-free reimbursements for qualified plan expenses.
- Quickly and easily access funds using the prepaid benefits card at the point of sale, or request to have funds directly deposited to your bank account via online or mobile app.
- Reduce filing hassles and paperwork by using your prepaid benefits card.
- Be comfortable knowing that secure access to accounts is available using a convenient Consumer Portal available 24/7/365.
- Manage your FSA “on the go” with an easy-to-use mobile app.
- File claims easily online (when required) and lets the system determine approval based on eligibility and availability of funds.
- Stay up to date on balances and action required with automated email alert and convenient portal and mobile home page messages.
- Get one-click answers to benefits questions. Use it or Roll It Over. And now, up to $500 of your available healthcare Flexible Spending Account balance can be carried over into the next plan year instead.
- FSA dollars can be used during the plan year to pay for qualified expenses and services, and a way to pay for expenses with pre-tax dollars.
FSA Scenario
With the use-it-or-lose-it rule and benefit limits, many employees (and some employers) wonder if the tax savings provided by a Flexible Spending Account (FSA) and Dependent Care Plan (DCAP) are worth the risks and hassles.
To show how an FSA and DCAP can provide significant tax savings for your employees, let’s consider the example of Joe Workman, an employee of ABC Company. With doctor’s visits, dental exams, and the annual cost of glasses and an eye exam for his son, Joe usually has about $2,600 in expenses that are eligible under an FSA. Joe and his wife, Beth, both work and have work-related child care expenses of $1,500 per month ($18,000 per year). Below are two scenarios, showing Joe’s net pay after these expenses both with and without an FSA and DCAP:
Joe Workman – Without an FSA or DCAP
With an FSA/DCAP
Annual Income $50,000 $50,000
Pre-Tax FSA Election $0 $2,750
Pre-Tax DCAP Election $0 $5,000
Taxable Income $50,000 $42,400
Annual Taxes $7,273 $5,552
After-Tax Income $42,727 $36,848
Out-of-Pocket Medical, Dental, Vision Rx $2,600
Work-Related Childcare $18,000 $13,000
Net Pay After Taxes and Expenses $22,127 $23,848
With an FSA and DCAP for his expected expenses, Joe is “giving himself a raise” of over $1,700 a year!
Joe’s company saves on Social Security, Medicare, and unemployment taxes with Joe’s elections as well:
Joe Workman – Without an FSA or DCAP
With $2,750 FSA/DCAP
Annual Income $50,000 $50,000
Taxable Income $50,000 $42,400
Annual FICA and FUTA $3,867 / $3,286
With Joe’s FSA and DCAP alone, his company saves over $500 a year in employment costs!
Handling the Risk of Use It or Lose It
Despite these potential savings, many employees (and employers) still don’t want to deal with the potential risks associated with FSAs. As you probably know, participants have to use their FSA election within the plan year towards eligible expenses; any unused funds forfeited to the plan—this is the infamous use-it-or-lose-it.
Employers have options available that can lessen this risk for employees and make the FSA a more attractive option:
- Grace Period: The grace period provision allows up to 75 days following the end of the plan year, during which participants can use their remaining balance from the ended plan year for new expenses. In an extreme case, this provision would allow a participant who used none of their FSA accounts during the actual plan year to use the entire election on expenses during the grace period.
- $500 Rollover: Since 2014, employers have had the option to add the $500 rollover to their FSA, which allows employees to “roll” up to $500 of an unused FSA balance from one plan year to another. This rolled amount becomes part of the new year balance and is available at any point during the new plan year.
NOTE – the $500 Rollover option is only available to the Health FSA benefit (not DCAP), and a Health FSA can only have the $500 Rollover OR the grace period option, but not both.
- Participant Education: Most employees are highly unaware of all the potential uses an FSA has. Using resources such as a list of ordinary eligible expenses or sites like FSA Store can help educate your participants and ensure they use the maximum amount of their FSA possible.
5 New Expenses Now Eligible For Your HSA & FSA Funds
When you participate in a Health Savings Account (HSA) and/or Flexible Spending Account (FSA), you’re able to contribute pre-tax funds for use on hundreds of eligible expenses. Recently, you gained even more flexibility in your ability to save when the CARES Act was signed into law. This new legislation expanded the list of expenses that are considered eligible by including popular over-the-counter products, which consumers can now purchase with their HSA or FSA without a prescription. This change went into effect on January 1, 2020, and allows over 20,000 new expenses as eligible moving forward. That’s great news for consumers, since the average American shops for over-the-counter medications 26 times each year.
Here are five of the most common expenses that are now eligible to use HSA and FSA funds without a prescription:
- Pain relief medications
Headaches. Muscle soreness. - Sprains – There are so many reasons to need pain relievers. There are two common types of over-the-counter pain medications: acetaminophen and nonsteroidal anti-inflammatory drugs (NSAIDs), both of which are now among the eligible expenses.
- Cold and flu products
Winter may be behind us, but cold and flu season never really goes away. As much as 20 percent of the U.S. population gets the flu, on average each season. Fortunately, the over-the-counter medicines taken to cope with a severe cough or congestion are now eligible expenses. - Allergy products
Thirty percent of American adults and 40 percent of children suffer from allergies. And the cost of allergies to the healthcare system is estimated at $18 billion. Those who do have allergies can now find relief with their HSA and FSA funds in the form of over-the-counter antihistamines and decongestants. - Heartburn medications
Heartburn is among the more common afflictions in this country. That’s why Americans spend billions of dollars each year on medicines that treat heartburn. The CARES Act means that these over-the-counter drugs are HSA and FSA eligible without a prescription. - Menstrual products
The CARES Act also included menstrual care products as eligible expenses for HSAs and FSAs. Eligible products include tampons, pads, and menstrual sponges.
