A flexible spending account (FSA) allows a worker to contribute pretax earnings to pay for qualified medical expenses, including co-pays, prescription medications, chiropractor visits, eyeglasses, and LASIK eye surgery.
But what happens if you don't use all the money in your account during the calendar year? Does that money roll over? Keep reading to find out more about the FSA, how it works, and what happens to any unused money you may have left over after the tax year ends.
- A flexible spending account lets individuals put aside pretax dollars to cover qualified medical expenses.
- The maximum amount you can contribute to an FSA in 2021 is $2,750 for each qualified account.
- Employers can generally allow employees to transfer a maximum of $550 from their FSAs into the next tax year or allow them a grace period until March 15 to use their unused funds.
What Is an FSA Rollover?
An FSA is a savings account offered by employers. It allows individuals to transfer contributions using pretax earnings through payroll deductions. Some employers also match a certain percentage of their employees' contributions. The money can be used for things like medical expenses and child/dependent care. The Internal Revenue Service (IRS) allows a maximum contribution of $2,750 for an FSA for the 2021 tax year.
The FSA was traditionally a use-it-or-lose-it account: Any money leftover at the end of the year was forfeited. But in 2021, the U.S. Treasury Department amended the original use-or-lose rule for these accounts to allow some funds to roll over at the end of the plan year.
According to the revised regs, employers have one of two options available for FSAs. They can either allow a maximum of $550 in unused funds in a health-related FSA to be rolled over from the previous year into the following plan year or they can offer employees a grace period of up to 2.5 months for employees to use the money.
For example, if you elected to contribute $2,600 for a year, but only spent $2,300, you could carry over the remaining $300 to use next year. Keep in mind, if you only spent $2,000, you could still carry over $550, but you would lose the remaining $50. If your employer allows you the grace period, you can use your account until March 15, unless your employer has another end date. You can't have both options available.
A sum rolled over from a previous year does not count against the next year's contribution limit. In addition, sums carried over can continue to be carried over in subsequent years.
The IRS' new guidance allows employers more flexibility for benefit plans for 2020 and 2021 as part of the Consolidated Appropriations Act. Employers can allow employees to carry over all unused funds from 2020 to 2021, and from 2021 to 2022—or they can extend the grace period from 2.5 months to 12 months. Either way, all unused funds can be carried over and used throughout the entire year.
Contribution Limits vs. How Much to Contribute
The IRS sets the FSA contribution limit, which is annually indexed to inflation. As mentioned above, that figure for the 2021 tax year is $2,750. There are ways to get around that limit, however. For example, an individual employed by two different companies during the tax year could contribute $2,750 under each employer’s FSA plan, provided the employers are unrelated.
This determines how much money one should annually allocate to an FSA account, based on the following qualified medical expenses:
- Prescription drug co-pays
- Dental and orthodontic expenses
- Eye exams
- Contact lenses and eyeglasses
To determine your FSA contribution for a year, estimate these expenses as a baseline while you factor in other potential family medical expenses.
The FSA grace period is a period at the end of the year during which time you can use any unspent money in your FSA. The grace period can be up to a maximum of 2.5 months but might be shorter depending on the way the plan is set up. Any unused FSA balance would be lost after the grace period ends.
Run-out is a predetermined period during which you can file claims for the previous year. For instance, if your run-out period lasts until March 31, you have until that time to file claims for expenses you incurred before Dec. 31.
Let's say you visited the dentist on Nov. 1, but you didn't file the claim right away. You could still file before March 31 and be reimbursed. If you wait until after March 31, you forfeit any unused funds.
The IRS established a contribution limit of $2,750 per qualified FSA for the 2021 tax year.
FSA vs. Health Savings Account (HSA)
Although they may seem the same, the differences between FSAs and HSAs can be confusing. So it's important to understand how they work. The following are some of the main differences between the two.
FSAs are only offered through employers, so if you're unemployed or self-employed, you can't open one. HSAs, on the other hand, are individual accounts, which means anyone can establish one. These accounts can be set up through a qualifying financial institution.
Both accounts can be funded through your employer. But if you leave your employer, you can't take your FSA with you. Fortunately, your HSA is a portable account, which means even if you quit your job, you can still access the money you've saved.
The maximum contributions for each account are different, too. The FSA has a maximum limit of $2,750 for 2021. The IRS set the 2021 limit for HSAs at $3,600 for individual accounts and $7,200 for family coverage. In 2022, the HSA contribution limits rise to $3,650 for an individual account and $7,300 for a family account.
Qualification is also different: There are no thresholds for FSAs, but there are for HSAs. According to the IRS, you must have a high-deductible health plan (HDHP) to be able to establish a HSA. For 2021 and 2022, your plan's deductible must be more than $1,400 for individual coverage or $2,800 for a family and your out-of-pocket expenses can't exceed $7,000 or $14,000 for self and family coverage, respectively.
The Bottom Line
Flexible spending accounts are tax-advantaged accounts that are only available to people through their employers. They provide an excellent way to save money for medical expenses or child/dependent care using pretax dollars. This helps you save for a rainy day and lowers your tax burden by lowering your taxable income.
But these accounts do have restrictions, including what happens to any money left over that you don't use. Be sure you do your research before you sign up for an account and speak with your administrator if you have any questions during the tax year.
Can I Reimburse Myself Using a Flex Spending Account?
You can use the funds in your flex spending account to reimburse yourself for medical expenses, but you will need to keep track of receipts and payments, and make sure that they are qualified expenses. Otherwise, you could be on the hook for taxes and penalties.
Can I Change My Annual Contribution Amount to My Flex Spending Account?
Yes. It may depend on the plan design, but most employers allow their employees to make a change to their contributions during the plan year.