New FSA Rule Modifications for COVID Reduction

Here’s a noteworthy replace for readers with a versatile spending account (FSA) – the Taxpayer Certainty and Catastrophe Tax Reduction Act of 2020, signed into regulation Congress on Dec. 27, 2020 as a COVID reduction measure, will probably provide you with some short-term flexibility on FSA carryover funds and the way you utilize your funds in 2021 and 2022.

The IRS lately clarified the brand new FSA rule modifications for 2021 and 2022:

  • Gives flexibility for the carryover of unused quantities from the 2020 and 2021 plan years;
  • Gives flexibility to increase the permissible interval for incurring claims for plan years ending in 2020 and 2021;
  • Gives flexibility to undertake a particular rule concerning post-termination reimbursements from well being FSAs;
  • Gives flexibility for a particular claims interval and carryover rule for dependent care help applications when a dependent “ages out” in the course of the COVID-19 public well being emergency; and
  • Permits sure mid-year election modifications for well being FSAs and dependent care help applications for plan years ending in 2021.

Probably the most noteworthy change right here is that the IRS is now permitting unused funds to carryover from the yr they have been contributed means of the subsequent yr (2020 to 2021 and 2021 to 2022) to assist with well being care bills throughout COVID. FSAs beforehand had a “use it or lose it” rule that dictated any unused FSA contributions have been forfeited on the finish of the yr (although employers may permit as much as 2.5 months grace interval to make use of funds). A couple of years in the past, a brand new FSA carryover rule was created that gave employers the flexibility to alter their FSA plans to permit as much as $550 (inflation adjusted 2021 restrict) to be carried over from one yr to the subsequent. With this short-term change, the $550 rollover limitation is eliminated and the two.5 month grace interval is prolonged means of the tip of the yr.

FSA rule changes

The utmost FSA contribution for 2020 and 2021 is $2,750 per yr. Hypothetically, an FSA proprietor may carry over as much as $2,750 in unused FSA funds contributed in 2020 to 2021 and the identical quantity contributed in 2021 to 2022, with none of these funds having to be forfeited.

The essential factor right here is your employer’s willingness to implement the modifications. The brand new regulation makes it potential for employers to make these modifications to FSA accounts, nevertheless it doesn’t make it obligatory that they achieve this. In different phrases: it’s as much as your employer to implement the rule modifications now that they’ve been given permission. So test along with your employer, and probably prod them to implement the brand new guidelines. In case your employer is not going to help you roll over extra funds, the very last thing you need to do is contribute extra in 2021 and lose unspent funds on the finish of the yr, so confirming the modifications have been applied is essential.

The rule modifications additionally apply to dependent care help applications. They don’t impression well being financial savings accounts (HSAs), as HSAs already permit limitless rollover funds, with no “use it or lose it” provision. For that motive, and their increased most contribution limits, HSAs are a favourite account kind and HSA contributions are nonetheless preferable to FSA contributions if you’re evaluating HSAs versus FSAs for well being care financial savings. Try my greatest HSA account picks, in case you have one and are desirous about a potential improve.

Full IRS legalese on the modifications could be considered right here, for these . Regardless that these modifications have been in mild of COVID, any FSA rollover funds and spending can nonetheless be spent on any FSA-qualified medical bills. Below the CARES Act laws final yr, Congress beforehand authorized OTC medicines and female hygiene menstrual care merchandise as certified medical bills, with out an expiration date. This implies which you could now use HSA, FSA, or HRA funds to make use of income-tax free contributions to pay for these things. Moreover, telehealth and digital psychological well being companies at the moment are listed as certified medical bills too, as is testing and therapy of COVID-19, per IRS Discover 2020-15.

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