Healthcare Flexible Spending Accounts for 2020

Transcript of Podcast Episode 104

Hello, this is Bill Rainaldi with another edition of Security Mutual’s “SML Planning Minute.” In today’s episode, “Healthcare Flexible Spending Accounts for 2020.

As year-end approaches, traditionally, many families who have had the benefit of using Healthcare Flexible Spending Accounts (or Healthcare FSAs) to help pay for health care expenses, such as medical, dental and vision expenses not covered by insurance, have had to ensure that all of the money in those accounts was spent. Generally, failure to use the money in the Healthcare FSA by the end of the year results in forfeiture of the balance. However, there are some important changes for 2020.”

Healthcare FSAs are accounts that are set up through an employer’s employee benefits program. It allows the employee to save up to $2,750 per year through salary reduction on a pre-tax basis to help reimburse certain out-of-pocket healthcare expenses spent during the year. That also helps to reduce income taxes. An employed spouse can also contribute a similar amount to his or her Healthcare FSA for a total of $5,500 per family. As medical, dental and vision expenses are incurred for the employee or dependents, so long as those expenses are not covered by health, dental or vision insurance, the employee may submit proof of payment of those expenses to the Healthcare FSA for reimbursement.

While Healthcare FSAs are normally a “use it or lose it” proposition, fortunately, depending upon the employer’s plan, there may be two options available for unused Healthcare FSA balances. The employer’s plan may provide a grace period of up to two and one-half months to use up the balance, or it may allow for up to $500 to be carried over to the following year. Note, however, that neither option is required to be included in the plan, so it all depends upon how the employer has set up the Healthcare FSA plan. Most employer plans have one of these options. Offering both options is not allowed.

As a result of the coronavirus pandemic, the IRS made several changes to the Healthcare FSA rules. Some are permanent changes and others are for 2020 only. In IRS Notice 2020-33, it modified the carryover rule on a going-forward basis to equal up to 20 percent of the annual salary reduction contribution limit. For 2020, that means the carryover limit into 2021 is $550, which is 20 percent of $2,750. In IRS Notice 2020-29, the IRS allowed mid-year changes to contributions, either to increase or decrease contributions. It also allowed mid-year enrollment into a Healthcare FSA. These changes are for 2020 only. Contribution and enrollment changes are normally allowed only during the open enrollment period for employees to choose certain employment benefits, typically during November of the preceding year, unless there is a change in circumstances such as a marriage or new child.

One other change made by the IRS that may impact you this year is for your 2019 Healthcare FSA. The IRS allowed employers with plan years and grace periods ending in 2020 to extend the grace period through December 31, 2020. This is an optional extension which employers may choose to adopt for their plans so check with your employer to see if this applies to you.

So, as we quickly near December 31, make sure that you have properly accounted for all of the medical, dental and vision care expenses that you have paid out of pocket this year, and reimburse yourself for those expenses out of your Healthcare FSA. Check with your employer’s human resources department to determine if your Healthcare FSA has a grace period or carryover option to ensure that you do not lose any of the money that you have saved and accumulated for your healthcare needs and those of your family.

Note that some FSA plans allow the participant to reimburse themselves through the use of a debit card linked to the FSA, rather than submitting receipts to the employer’s plan. In those situations, it is advisable to keep all of the receipts for which you are reimbursing yourself in case of an IRS audit.

Contact your local Security Mutual Insurance Advisor today to coordinate your financial plans and help you achieve your goals and objectives.

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