Flexible Spending Accounts, or FSA’s, have changed a lot these past few months. These FSA changes are upending what you might think you know about the FSA and how to use it. And in my opinion, they’re changing for the better.
We all know the pandemic has wreaked havoc on the “normal” course of expenses for daycare/childcare and health care. And that can wreak havoc with the use of accounts such as an FSA where they have a “use it or lose it” philosophy. When your daycare closes, and you’re not paying for childcare, what happens to the thousands of dollars you set aside? If you’re not going to the doctor, what about the thousands you set aside for medical expenses? If your childcare needs suddenly change – maybe you didn’t need childcare but now you do because the pandemic closed your schools – how can you adjust your savings? After all you didn’t have a “qualifying life event” (marriage, birth, death, divorce, etc.) so you aren’t eligible to make an FSA change.
Or are you?
What you thought you knew about FSA’s has changed a lot in the past few months. You might have missed them if you, like me, were slightly distracted by this thing called “COVID 19”. But some of these changes are really important, especially to working moms – and they may change what you think you knew about the FSA. Even if you don’t have, and don’t want, an FSA, knowing about these changes is important in case you or someone you know might need to use them. These FSA changes range from the small to the very significant.
What Is The FSA Again?
Feel free to skip this section if you’re already familiar, but for those who need a primer, here’s the basics.
The FSA – or Flexible Spending Account – is a spending account that you contribute to through your employer. Not all employers offer an FSA, but when they do, they can be helpful for paying for specific types of expenses in a tax-friendly way.
There are two main types of FSA’s:
Dependent Care FSA: The Dependent Care FSA is used to pay for childcare expenses. Typically this would be daycare, but could also be a full-time preschool, nanny expenses, babysitting, or summer camp used for childcare of kids under 13. This type of arrangement saves you from paying taxes on the money used for childcare, so the exact value of this type of FSA varies depending on your tax rate, but is a good way to save on one of the largest expenses for working parents of young children.
Health Care FSA: The Health Care FSA is used to pay for specific health care expenses. You can find a list of the types of expenses here. The types of expenses you can use a Health Care FSA for are broader than those you might think of as covered by traditional insurance. For example, you can pay for breastfeeding classes, contact lens solution, and Braille books (at least, the difference in cost between a Braille and non-Braille book).
You can enroll in an FSA alongside an HSA, assuming your employer offers what’s called a “limited purpose” or “post-deductible” FSA. In this type of FSA, you can pay for dental or vision expenses (braces, glasses, etc) and then use your FSA to pay medical expenses after you hit the deductible.
FSA’s had/have certain limitations (some of which are changing!) that can be considered a drawback to using them. There are limits to how much you can contribute, so you may not be able to use them to fully cover your childcare or medical expenses. They’ve had a “use it or lose it” philosophy, and if you didn’t use the money in the year you contributed, you were usually out of luck. Because they’re limited when being used with the HSA, and they’re not offered by all employers, some folks aren’t able to take advantage of these funds. If you leave your job (whether by your choice or not), you can’t use your Health Care FSA for expenses incurred after your employment end.
The HSA gets a lot of love and attention in the personal finance community. The FSA gets a lot less attention. But an HSA can’t pay for dependent care expenses, while the FSA can. And with the “limited purpose” FSA, you can get tax savings on dental, vision, and potentially post-deductible medical expenses while reserving your HSA for future investment purposes.
- Dependent Care FSA
- Health Care FSA
- Limited Purpose/Post – Deductible FSA
- And of course the ultimate source of all things spending account, IRS Publication 969
So that’s the basic FSA information. What’s changed so much over the last four months?
FSA Changes – Disclaimer Before We Jump In!
Many of these changes are optional – as in, your employer can elect to offer them, or they can decide not to. What can you do if your employer offers an FSA but isn’t offering these benefits? Contact your employer and advocate for them to make the change!
First FSA Change – Unlimited FSA Carryover from 2020 to 2021 For Both Health and Dependent Care
It used to be that one of the disadvantages of the FSA was that you had to “use it or lose it” within a single calendar year. A few years ago, the law changed to allow a $550 carryover with the Health Care FSA, but still didn’t allow carryovers of dependent care FSA dollars.
With the Consolidated Appropriations Act, this is changing. Now plans can offer unlimited carryover of both types of accounts. This is a huge relief to the many people who had significant changes in their lives in 2020 that left them with unused funds.
The pandemic has hugely disrupted all childcare, especially daycare. From March through fall, many daycares in the states shut down entirely, or remained open only for essential workers. Even now, as I discussed in my article on working women impacts from COVID, many daycares remain closed. Closed daycares don’t require payment.
Health care expenses also saw a tremendous disruption in 2020. People postponed planned procedures like knee surgeries and hip replacements. They didn’t see the doctor as much. Emergency rooms remained empty. All of this means that medical expenses were lower than usual for many people.
These two facts have left a lot of folks with extra 2020 funds. And they couldn’t stop their contributions, because there was no “qualifying life event”. Whoever wrote the life event list forgot to put “global pandemic” on it!
So this allowance for unlimited carryover for both types of FSA’s is a big help to everyone left with extra money at the end of last year.
Second FSA Change – The Grace Period Isn’t Two and a Half Months Anymore
Usually there’s a pretty short time limit on the “grace period”, which is the time you have to use the prior year FSA funds. You had to use them up by the 15th of the third month following the end of the plan year. For most people, but not all, this is March 15th.
But now, that grace period can extend a full 12 months after the plan year is over. For most plans, that means December 31st of the following year. This is very helpful for those where their employer decides to opt for a longer grace period instead of the unlimited carryover, since they’ll still have an extended opportunity to use prior year funds in 2021.
Third FSA Change – You Can Use Your Health Care FSA After Your Employment Ends
The pandemic saw the employment of a number of people end suddenly, through no fault of their own, as entire industries ended overnight. Even today, millions of people are out of work, and many are losing their jobs every week. Under the old FSA rules, you were out of luck for your health care FSA dollars. You would have to spend them on expenses incurred before your employment ended, or you would lose them.
Now you can spend the dollars in your health care FSA through the end of the plan year, meaning you can use it to cover medical expenses while you’re out of work. Rather than losing money just when it’s needed most, people can use it up on medical expenses.
Fourth FSA Change – A Change to the FSA Age
Dependent Care FSA’s can typically only be used for children who are under the age of 13. The assumption being that kids who are 13 and older can care for themselves.
Now the dependent care FSA can be used for children under 14 who turn 13 during the plan year. It’s a small change, but a helpful one to those with now-teens.
Fifth FSA Change – Qualifying Life Event No More! Change Your FSA Mid Year
As I mentioned earlier, you used to need to have some sort of life event in order to change your insurance elections. Those include typical events like marriages, births, deaths, and divorce, as well as gain or loss of employment. But interestingly enough, they didn’t include “global pandemic”.
The change under the same Consolidated Appropriations Act allows you to not only enroll in, or stop, an existing FSA. But you can also change the amount you’re putting into either a Health Care or Dependent Care FSA mid year.
This is so important during the pandemic time, because things can change on a dime. Maybe you didn’t need a dependent care FSA because your kids are in in-person kindergarten. But all of a sudden the school closed for a month, and now you need to pay for childcare. Or perhaps you had set your dependent care FSA amount assuming schools would stay closed. And now they’re open again, so you don’t need as much.
Maybe you thought you wouldn’t need a health care FSA. But now you need glasses or dental work and you were kicking yourself for not enrolling. Well now you can!
Sixth FSA Change – Use The FSA For Expenses Before Enrollment
The disruption to employment, and the fact that many industries are coming (or will soon come) roaring back to life quickly means that there are quite a few people who will start employment in the middle of the plan year. Those people may have medical expenses they had to pay out of pocket. Or dependent care costs for when they were looking for work. Under the normal FSA rules, the new employer’s FSA couldn’t be used for these costs.
But now, you can use the FSA for those expenses. This is very helpful to anyone who had employment disrupted by the pandemic. If you’re newly hired, and have medical or dependent care expenses from before you were employed, go check to see if your employer is offering this feature.
Seventh FSA Change – Changes To The Way FSA’s Work With HSA’s
Usually, you can’t switch from a “full purpose” to one of those “limited purpose” FSA’s in the middle of the year. Also, you typically can’t contribute into an HSA until the end of your FSA “Grace Period”. Which, as we talked about earlier, was usually the fifteenth day in the third month after the plan year was over.
Now – you guessed it – both of those things have changed. You can indeed change over to a “limited purpose” HSA compatible FSA in the middle of the year. All the FIRE people who recently learned how great the HSA is for long-term medical cost investment – this is for you!
Also, for employers who decide to allow for that twelve month grace period we discussed earlier, there are options they can offer their employees which will allow them to contribute to an HSA. Those options are:
- Convert the FSA into a limited purpose one OR
- Allow the employee to decide whether to convert to a limited purpose FSA AND/OR
- Allow the employee to opt out of the extended grace period
All of these FSA changes make it a bit more HSA friendly.
Eighth FSA Change – Dependent Care Contribution Amount
The American Rescue Plan changed the dependent care contribution limits. The prior limit was $5000 (or $2,500 for people filing separately). Honestly this is quite low and doesn’t cover daycare in most of the country. It certainly helps, and no one turns down tax benefits! But with infant care costing around $15,000 per year on average (and going up with multiple children), it just made a dent. The amount is better for older children, where you’re paying for summer care and before/after school care. Even then, those costs can easily exceed $5k per year.
The American Rescue Plan changed those limits to $10,000 ($5,000 for married filing separately), but just for 2021. The amount will revert back to the old dollar amount next year if Congress doesn’t act.
Will These FSA Changes Be Permanent?
Honestly, who knows? Once a limit increases, or a limitation removed, there’s often pressure to keep those changes in place. See – inheritance tax changes. But not always, and the pandemic is obviously a once in a lifetime type of situation. At least, it better be!!! Whether or not some or all of these changes endure will be something to figure out down the line. The same is true of a number of other temporary provisions put in place to help with the pandemic. For now, we should get to know this list to update our understanding of FSA’s. And keep an eye on Congress for future changes.
FSA Changes Resource List – and Learn More!
Want to see where I got all this information, or learn more? Check out these resources.