A flexible spending account (FSA) is a type of tax-advantaged financial tool, which some employers offer to their employees to help offset their medical costs using pre-tax dollars. FSAs are similar to Health Savings Accounts (HSAs), but FSAs are only available to those employed by a company, whereas self-employed individuals have access to HSAs.
- A flexible spending account (FSA) is a type of tax-advantaged financial account.
- Employers may offer FSA accounts to their employees as an additional benefit.
- Prior to the coronavirus pandemic, money deferred into an FSA during the calendar year was forfeited, if it was not claimed by the expiration deadline.
- Under the Taxpayer Certainty and Disaster Tax Relief Act of 2020, created during the height of the coronavirus pandemic, money in an FSA may be rolled over in 2021 and 2022, depending on the employer and plan.
- For 2021, the maximum salary reduction a person can put toward an FSA is $2,750, but in 2022 the amount goes up to $2,850.
FSA Expiration Dates Extended
With an FSA, employees typically contribute a set amount each paycheck from their gross pay; these contributions are tax-free, as long as the funds are used for qualified medical expenses. The Internal Revenue Service (IRS) defines a qualified medical expense in Publication 502.
FSAs do expire. In fact, they should be considered a "use it or lose it" type of plan, and before the Covid-related pandemic, funds left in the account ran the risk of expiring if not claimed by the expiration date. However, under the Covid-related Taxpayer Certainty and Disaster Tax Relief Act of 2020, FSA funds from 2020 and 2021 may be rolled over and used in 2021 and 2022, giving FSA-holders flexibility with their funds.
For 2021, the maximum salary reduction a person can put toward an FSA was $2,750, and in 2022, this amount goes up to $2,850.
According to the U.S. Bureau of Labor Statistics, the percentage of private industry workers with access to a healthcare FSA in 2021 was 43%, and 71% percent of state and local government workers had access in 2021.
Grace Period or Carryover
While unclaimed monies in an FSA account are typically forfeited at the end of the year (2021 and 2022 notwithstanding), some plans may offer a grace period or carryover. A grace period is a certain amount of time in which the employee may submit a claim that may go past the end of the calendar year; the grace period tends to be around two to three months, so if it expires in January, you will need to spend those funds by mid-March. Unfortunately, once the grace period expires, all unused balances are forfeited.
Some FSA plans also offer a carryover, where plans may allow up to $550 to be used for the following year's expenses. The FSA plan specifies this limit, which may be less than the maximum of $550.
In light of the COVID-19 pandemic, Congress passed the Consolidated Appropriations Act, 2021 that allows all unused funds for plan years 2020 and 2021 to be carried over to 2021 and 2022, respectively. Or, employers can extend the grace period to 12 months (versus 2.5 months)—the effect of either decision is the same: all unused funds can be carried over and used throughout the entire year.
Use Your Funds by Year's End
It is possible to be caught off guard by the clock on your FSA funds, but thankfully the end of the year can be a great time to use up your funds. There are many options for using your funds even at the last minute, from stocking up on eyecare supplies to sunscreen for your winter break. Some FSA plans also allow employees to purchase household medical supplies, first aid kits, bandages, and even travel sickness bands. Hundreds of items are available at the online FSA Store.
Even better, call your medical providers to set up any appointments you may have put off during the year or get your teeth cleaned—FSAs typically cover both.
The Bottom Line
Because FSA plans often vary from employer to employer, it is a good idea to understand how your particular account works. For example, expiration dates may vary, and some accounts have a grace or carryover period, depending on what your employer offers. Reviewing your plans annually, either by meeting with your HR department or calling the plan's provider, is a smart way to ensure you are using your plan to its full advantage.
If you plan on leaving your job, you don't want to leave any money in your account because it often reverts to your employer, so make sure to use up any funds left in an FSA before changing jobs.