Federal Law Allows for More FSA Flexibility

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Flexible spending accounts, or FSAs, offer employees a tax-advantaged way to pay for eligible health care and dependent care expenses. Usually, you need to sign up during a short open enrollment period and could lose unused FSA funds at the end of each year. However, as part of a recent federal law, employers are now allowed to make their FSAs even more flexible during 2021 and 2022.

What Is an FSA?

If your employer offers an FSA, you can choose to sign up and fund the account with pretax dollars. You can then use the funds for eligible expenses without having to pay taxes on the withdrawals. Keep in mind, FSAs are not the same as health savings accounts (HSAs), which aren't tied to your employer.

There are different types of FSAs; your employer may offer one or more of these options:

  • Health FSA: Health FSAs allow you to use the funds for a variety of health care-related expenses, including deductibles, copayments, medical equipment and medications.
  • Limited-purpose FSA (LPFSA): You can only use LPFSA funds for a narrow list of eligible vision- and dental-related medical expenses. However, their limited use also means you can have an LPFSA and also a health savings account (HSA), which isn't an option with a general health FSA.
  • Dependent care FSA (DCFSA): Also called dependent care assistance plans (DCAPs), you can use DCFSA funds for expenses related to caring for qualified dependents, such as child care or elder day care costs.

Your FSA's "plan year" may align with the calendar year, or your employer could choose a different plan year, such as one that aligns with its health insurance plan year or its fiscal year. The timing can be important because, similar to signing up for a health care plan, there's a limited open enrollment period when you choose your FSA contribution amount for the following year.

Certain life events may qualify you for a special enrollment period, including marriage, divorce, having a child or starting a new job with an employer that offers an FSA. But generally, you can't change your contribution amount until your next enrollment period.

FSA accounts also have annual contribution limits and a "use it or lose it" provision. Funds that are left in the account at the end of the plan's year may be forfeited. With health care FSAs, however, your employer can allow you to roll over up to $550 to the next year or give you a 2½-month grace period to use the remaining funds.

Temporary FSA Changes Offer More Options

The Consolidated Appropriations Act, 2021 was signed into law in December 2020. The $2.3 trillion spending package includes many provisions, including $900 billion in coronavirus stimulus relief and temporary changes for FSAs.

The law allows but does not require companies to make these changes to the FSA plans they offer employees. As a result, your company may still be operating under some, or all, of the standard rules outlined above.

The optional changes in the new law include:

  • No limits to carrying over funds: Rather than being limited to carrying over up to $550 from one year to the next, you may be able to carry over unlimited funds from plan year 2020 to 2021—and from plan year 2021 to 2022. The carryover option also applies to DCFSAs, which usually don't allow any amount to be carried over.
  • Up to 12-month grace period: For FSAs whose plan years end in 2020 or 2021, you could receive up to a 12-month grace period to use your contributed funds.
  • Change contributions during the year: For FSAs whose plan year ends in 2021, you can change your contribution amount at any time, even if you haven't experienced a qualifying life event.
  • Access funds even if you're no longer an employee: Generally, you can lose FSA funds if you leave your job or are laid off. There may be a grace period or extension if you sign up for COBRA coverage. Additionally, employees who stopped participating in an FSA in 2020 or 2021 can now be given until the end of the plan year plus a grace period to spend down the account.
  • DCFSA child age limits extended: If you enrolled in a DCFPA before January 31, 2020, and your qualifying child turned 13 during the plan year, you can continue to use the DCFSA until they turn 14 or the 2021 plan year ends.

Ask if Any Changes Will Apply to Your FSA

Setting money aside in an FSA can be particularly helpful when you're certain that you'll have eligible medical or dependent care expenses. The added flexibility that these changes allow also mean you might not have to worry as much about losing unused funds.

Reach out to your supervisor or HR department to see if the new provisions have been implemented or if there's a plan to make a change. Employers may need some time to think through the options and roll out changes, but that shouldn't hurt you: The law also allows the changes to be retroactive.