The CARES and CAA Acts defined new qualifying events that allow employees to amend their benefits selection and carry over unused 2020 funds into 2021 and 2022.
Here's what you need to know:
- The 2021 Healthcare Flexible Spending Account contribution limit is $2,750
- Contributions made to an FSA are not subject to taxes
- FSA funds can be used to cover medical expenses, including deductibles, copays, over the counter medications, prescriptions, and other related medical costs
- HSA funds, on the other hand, use pre-tax payroll deductions to in turn lower gross incomes and annual tax burdens
- HSAs are limited to $3,600 for 2021
This story was last updated March 24, 2021
Let’s take a look at new flexible spending account regulations, how they’ve changed this year versus last year thanks to the IRS and The Coronavirus Aid, Relief, and Economic Security (CARES) Act, and the benefits of opening an FSA versus a health savings account.
2021 healthcare FSA contribution limit
For 2020, the IRS raised the FSA contribution cap to $2,750, an additional $50 more than the previous year. The limit is set to stay the same in 2021 and it applies to all health FSAs, which includes those accounts restricted to individual coverage, such as vision or dental services.
For 2020, the IRS raised the FSA contribution cap to $2,750, an additional $50 more than the previous year. The limit is set to stay the same in 2021 and it applies to all health FSAs.
Benefits of an FSA account
There are several benefits to having an FSA. First, contributions made to an FSA are not subject to taxes, making it a potentially more lucrative option for staff members who would rather not pay their healthcare expenses out of pocket using their own taxed income.
Employees can use FSA funds can to cover medical expenses, including:
- Over-the-counter medications
- Prescriptions, and
- Other related medical costs
In 2020 and 2021 the scope of eligible expenses expanded to include additional over-the-counter medicines, feminine hygiene products, protective masks, and specialty medications related to the pandemic. The CARES Act also grants no-cost COVID-19 testing for those enrolled in their employer-sponsored health plan (meaning zero co-pay or deductible usage).
This (among other reasons we’ll cover here) is why FSAs are very advantageous for families. An employee who contributes to a company-sponsored FSA can use the funds for themselves, their spouse, or children. In the case of dependent care, it can help shoulder some of the burdens of high medical expenses. By being able to use pre-tax dollars for family co-pays, prescriptions, or even things like orthodontics, the employee saves a great deal of money over the course of a year.
Through the Consolidated Appropriations Act (CAA), the IRS increased the reach of health and dependent care FSAs by allowing up to $550 of unused FSA funds from 2020 (20% of $2750, the maximum annual selection) to carry over into 2021 and 2022. It also has the added benefit of allowing employees to change their FSA contribution rate through the course of 2021 without requiring a qualifying event to precede it, such as a change in marital status or the birth of a child.
Differences between an FSA and an HSA
An FSA is much different than an HSA. Since employees can usually only enroll in one of these options, it’s important to understand which one is best for your specific needs.
FSAs provide for tax-free reimbursement for healthcare expenses up to the amount that the employee has contributed for the year (up to the $2,750 limit).
HSA funds, on the other hand, use pre-tax payroll deductions to in turn lower gross incomes and annual tax burdens. The money employees contribute to an HSA can go toward healthcare expenses, as well as investments like stocks or bonds. There are different contribution limits as well, with FSAs limited to $2,750 and HSAs limited to $3,600.
Another point to consider between FSAs and HSAs is that FSAs are employer owned, and accounts are non-transferable if the employee decides to leave the company. Employers do not own HSAs, so no matter where you work, your HSA goes with you. The same applies if you enter retirement.
While HSA funds generally roll over every year, only a partial amount of FSA funds will do so for a limited time. Understanding these key differences can help you better decide which type of account is more beneficial based on your current job situation and your healthcare needs.
Regardless of whether you selected an FSA or HSA at the start of the year, the CARES and CAA Acts are allowing employees to modify plan selections. Workers can modify selections to better match their emergent needs, including:
- New plan enrollments
- Cancellations, and
- Election changes to their tax-free contributions
This means that it’s definitely the right time to revisit your start-of-the-year elections and check with your employers to take full advantage of these important exemptions.