While many people know about the "use-it-or-lose-it" rule when it comes to a flexible spending account (FSA), many employers are increasingly instituting a safeguard to help their employees budget each plan year: the FSA rollover.
So what is it and where can you sign up? Well it's a little more complicated than that, and thanks to a number of FSA improvements made on the legislative level in 2020, the FSA rollover is about to become a lot more relevant for millions of American families. Let's dive in to explain how this handy account provision works and how you can budget around it to maximize the potential of your FSA dollars.
What is the FSA rollover?
Also known as the "FSA carryover," this provision was introduced in 2014 by the Internal Revenue Service (IRS) to give FSA users additional flexibility in managing their funds with plan-year forfeiture deadlines. When setting up an FSA plan, employers can choose to implement either the FSA rollover or an FSA Grace Period (which gives FSA users 2.5 months after their plan year ends to spend their remaining funds). Employers are not obligated to offer either feature, but if they do they cannot offer both features under the same plan. So whether you are starting a new job, or have been with yours for quite some time, be sure to ask your HR department to find out if these types of deadline extensions are in place with your plan.
Now here's the big change to keep in mind: when the FSA rollover was created back in 2014, the IRS would allow up to $500 to be rolled over into the next year's plan allocation. But in a big change for 2020, the IRS announced that it would be increasing the threshold for the rollover to $550 for any plan year that began on or after January 1, 2020, and that number is set to be adjusted for inflation in future years, too. That may not seem like a lot, but it's a new degree of flexibility that account holders can take advantage of whether they are worried about forfeiting their last few dollars or budgeting for a big-ticket medical service down the road.
Now that we know what the FSA rollover is, let's explore how you can best take advantage of it with these tips:
1. FSA rollovers don't count against your yearly contribution limit
This is probably the biggest piece of information to keep in mind when you're planning your budget around your FSA rollover. While FSA contribution limits have not been announced yet for 2022, we are to assume the current limit of $2,750 is subject to change in the new year. If your employer offers the FSA rollover, you can add $550 of your 2021 funds to your 2022 contribution, which would give you $3,300 to spend in 2022. And remember, your FSA contribution is available in full from the beginning of your plan year, so if you're planning on covering the cost of a bigger medical procedure like LASIK, you'll have your full contribution to work with as you make your decision.
2. Rollovers make it easier to plan for unexpected expenses
One tip that we always recommend to FSA users, whether they have the FSA rollover or not, is to give yourself enough of a cushion in your yearly contribution to handle sudden medical emergencies and illnesses that may come up. After all, if for some reason you have to visit a specialist or have medical tests done, being able to cover part or all of that extra expense should be factored into your yearly contribution. Of course, if you stay happy and healthy all year long, that could leave you with extra money to spend at your plan year deadlines.
FSA rollovers provide a measure of relief for FSA users when preparing for the worst - as long as they spend their FSA dollars down to below the $550 threshold, they can ensure that they won't forfeit funds at the end of their plan years and have a reserve to cover unexpected medical expenses if they happen.
3. FSA rollovers and HSA compatibility
Finally, if you're interested in making the switch to an HSA in the near future and you're currently enrolled in an FSA with a rollover, there is an important piece of information to keep in mind. According to WageWorks:
"If your employer offers a Healthcare FSA with Carryover, you should elect an HSA-compatible FSA for the new plan year so you can carry over up to $550 and contribute to an HSA to maximize your savings. If you don't enroll in an HSA-compatible FSA, you forfeit the remaining balance in your Healthcare FSA."
In other words, if you're planning on switching to an HSA in the future, you can't be enrolled in a general medical FSA and an HSA at the same time. You'd have to switch to a limited purpose FSA to rollover that money into in order to contribute to an HSA. Because this money bridges multiple plan years, it's an important factor in determining your eligibility for other types of tax-advantaged healthcare accounts like an HSA. So factor this into your long-term benefits planning if you think an account switch may be on the horizon.
If you have an FSA rollover, be sure to give your employer a big "thank you!" You have a lot more freedom to take advantage of your FSA funds to reduce your tax burden, treat medical conditions as they arise and help support your long-term health for the future.
4. The Consolidated Appropriations Act
Recently, legislative changes were passed that allowed employers the option to extend employees’ 2020 FSA grace period deadlines into 2021 or to increase the amount that is rolled from one FSA plan year to the next. This means that your deadline could have changed, or you may have even more funds than you thought to spend this year.
What does that mean for me? You might still have 2020 FSA funds available to spend in 2021 that you thought you lost and your new deadline could be quickly approaching.
How can I find out? We have outlined three easy methods to help you confirm your deadline (and maximize your FSA dollars).