With millions of Americans turning to their flexible spending account (FSA) dollars to cover the immediate costs of medical care and virus preparedness amidst the COVID-19 pandemic, a few very important FSA changes have emerged in recent months. The first was the CARES Act, which opened up over-the-counter (OTC) medicines and feminine care products to full FSA eligibility, while the second came this week as the IRS took a major step to open up mid-year FSA changes to account holders.
In the past, mid-year FSA changes were only allowed if the account holder experienced a qualifying life event, such as marriage, the birth of a child or a change in employment. Because of the public health crisis, this week the IRS provided two new notices that may provide additional flexibility for FSA users:
Notice 2020-29: This notice allows for mid-year changes for health plans including FSAs to allow employees to elect new health plan coverage or revoke existing coverage dating back to the beginning of the year. This means that account holders can choose to elect into or opt out of an existing FSA or increase or decrease a current FSA election. Here's the big thing to remember: this will only be available to account holders whose employers allow these mid-year changes.
It also allows for a possible extension of previously expired 2019 funds if an employer chooses. The Notice provides the option for employers to further extend FSA deadlines through the end of 2020 for 2019 plan years which had certain deadline extensions already in place.
What does this mean?
This is a big one in the history of FSAs. Account holders effectively have the opportunity to reduce their overall FSA contribution, or withdraw from their program if permitted by their employer and if they so choose. Conversely, those who aren't enrolled in an FSA and want to use this opportunity to save on expected healthcare costs, or up their contribution for 2020, have the ability to do so if their employer chooses to participate. Account holders should start by consulting their benefits administrator or HR department for more information on whether these changes will affect their accounts.
Notice 2020-33: This notice increases the maximum FSA carryover allowed from $500 to $550, if amended and allowed by the plan. In 2019, President Trump signed an executive order directing the US Treasury to increase the FSA carryover amount. In response, the maximum carryover amount has been increased to $550.
What does this mean?
The $550 was indexed to inflation and represents 20% of the 2020 total FSA allowed maximum for the year of $2,750 (the prior limit of $500 was 20% of the original FSA election limit of $2,500). When it comes to enacting these changes, employers may choose to allow up to $550 to carryover or a lesser amount if they choose. Carryovers are one of three deadline extension options which employers may or may not allow.
Once again, a good first step for account holders is to consult their benefits administrator or HR department to find out if a carryover will be available during their plan year and if so, what the maximum carryover amount will be.