It's that time again! Now that open enrollment periods are underway, it's the one time a year that employees can make important benefits changes for the year ahead. If you were enrolled in a flexible spending account (FSA) in the past year or are thinking of going for one in 2020, knowing just how much you can put into your account is pivotal for your annual health spending plans.
Each year, the Internal Revenue Service sets the contribution limits for individuals opening an FSA and married couples filing jointly. In 2019, the individual limit for FSA contributions was $2,700, but the IRS is raising the limit for 2020 to $2,750. Check below for the information you'll need to make an informed decision for the coming year.
2020 FSA Contribution Limits
Yearly Contribution Limits: $2,750 per FSA. If both spouses have an FSA through their respective employers, they could each elect the maximum for $5,500 per household.
Plan Year: Most often one (1) year. In limited circumstances, there may be a shorter plan year.
Eligibility to Contribute: FSAs can only be sponsored by employers and eligibility rules are set by each plan. Employees who work for employers who offer FSA plans may contribute up to the allowed maximum per year. Self-employed individuals and owners of certain types of corporations are not eligible for an FSA.
Account Ownership: An FSA is owned and set up by the employer.
Access to Money: An employee's yearly FSA allocation is available in full on the first day of the plan year, regardless of contributions to date.
Change Contributions? FSA users can only change their contributions during their open enrollment periods. Some plans also allow changes to contributions to be made if the account holder experiences a qualifying life event, such as marriage, divorce, or birth of child.
Special Rules/Eligibility Exceptions: Employers can choose one of two (or none) options to provide relief for FSA users who would otherwise have to forfeit leftover funds:
- The $500 rollover allows FSA users to move up to $500 of the previous plan year's contribution into next year's allocation (without counting against the overall contribution limit) to avoid forfeiting money to their employers at year's end.
- The second is the FSA Grace Period, which gives users 2.5 months after the last day of their plan years to spend down their remaining FSA funds. For more information about what an FSA can cover, visit the FSA Eligibility List.
Some additional things to consider
- The 2020 limit applies on a per plan basis regardless of single vs. family, so the max is $2,750 per FSA plan. If spouses both work for companies which offer an FSA, they could each enroll in their employer's FSA and contribute the maximum amount.
- The max is for pre-tax employee contributions only. Employers could choose to contribute in excess of the $2,750 if they choose.
- The FSA rollover of up to $500, if permitted, does not count towards the max. If someone rolled over $500 this year and elected $2,750 for next year, they could have a full account balance of $3,250 in 2020.
- Learn more from IRS Revenue Procedure 2019-44.
FSA-eligible items to plan for
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With mornings getting slightly chillier, and open enrollment knocking on our doorsteps, we know that the upcoming year's FSA contribution limits are coming! But before that, we turn to Mercer -- the world's largest HR consulting firm -- to make their annual benefits predictions for the coming year.
Well, the day has arrived. Mercer announced the projected 2020 limits for flexible spending accounts (FSAs), along with info on qualified transportation benefits, and Archer medical savings accounts (MSAs). Though these are projected totals, the limits are determined using the Internal Revenue Code's cost-of-living adjustment standard, along with other parameters.
As anticipated, the FSA contribution limit is expected to rise an additional $50, bringing the total annual limit to $2,750. The total is hardly surprising, as we've become accustomed to these incremental boosts, year over year. Of course, we'll still wait for the IRS to make its official announcement, but historically these projections hold true.
To see the full projections, head over to Mercer and see its 2020 Qualified Transportation, Health FSA and Archer MSA Limits article, in full.
And of course, stay tuned to the FSA Store Learning Center for the latest on your 2020 open enrollment and benefits planning.
New ways to use your FSA funds...
Figuring out how much to contribute to your FSA is a bit like deciding how much food to bring on a backpacking trip. Once you get out in the wilderness, you're stuck with the rations you've brought - if you packed too much, you may have to toss it along the way. If you packed too little, you'll have to end the trip early.
Because you can't change FSA contributions mid-year unless you have a qualifying event, like changes in marital or work status, it pays to contribute the right amount. Contribute too little and you may end up with some hefty out-of-pocket expenses.
Contribute too much and you'll be faced with a dilemma - roll over up to $500 to the next year or try to spend the remaining balance in the first two and a half months. Everyone has a magic number for how much they should contribute to their FSA. Here's one way to find yours.
Go through last year's expenses
The best way to decide how much to save for health care expenses is to look at how much you spent the previous year. Log on to your insurance account and see if you can find the total amount you paid, not including monthly premiums.
Include how much you spent for all medical expenses, such as glasses and contacts, prescriptions, counseling and therapy visits, medical devices, dental visits and more. Then, examine those expenses and determine how common they were. If your only visits to the doctor were because of ordinary problems like the flu or sinus infection, you can probably estimate this next year will be the same.
If you ran into a major health problem, you should evaluate if next year will be similar. Some issues, like diabetes or asthma, require more-frequent doctors' visits. Others, like appendicitis, happen once a lifetime.
If you had a costly medical emergency, consider the likelihood that it will occur again and whether or not to include that figure in your estimate.
Compare health insurance plans
Even if you're signing up for a similar health insurance policy, the deductibles, copays and coinsurance rates might change from year to year. Compare the figures to see if you'll be paying more and adjust your FSA contribution accordingly.
For example, if your health insurance copay is increasing from $40 a visit to $60, add up how many visits you made last year and multiply them by $20.
Think ahead about major procedures
Sometimes you know about major operations and procedures ahead of time, so you can plan ahead. If you know this is the year when you're going to get LASIK surgery or finally get your knees replaced, call the insurance company to get an estimate of those costs.
Most of the time you can get an accurate idea of the expenses you're facing. If the insurance company can only guess what your costs might be, go with the higher end of the estimate. This way, you'll be covered in case you end up paying more.
What if you picked the wrong number?
If you end up saving more than you needed, ask your HR rep about the company's rollover policy. Most will either let you roll over $500 or give you a grace period of 2.5 months to spend the remainder. If you saved too little, try upping your contributions next year to maximize your tax-free benefits.
Finding your FSA magic number is essentially, a guessing game. Don't be surprised if you estimate too much or too little the first time you do it. It's all about taking charge of your finances and making the most educated guess possible.
From FSA basics to the most specific account details, in our weekly Asked and Answered column, our team gets to the bottom of your most-pressing flex spending questions. It appears every Wednesday, exclusively on the FSAstore.com Learning Center. And for the latest info about your health and financial wellness, be sure to follow us on Facebook, Instagram, YouTube and Twitter.
With a flexible spending account (FSA) it's usually required that you use your FSA funds within the plan year for which you contribute them, which can be a tough sell if you're generally healthy and don't have any planned health care needs.
But if you typically spend a lot on health care costs or you're already working on saving for a major surgery or procedure, it could be a no-brainer.
That was the case for me in 2015 when my son was born. By using an FSA to cover most of the hospital costs, it not only saved us money on taxes but it also simplified the payment process.
Leading up to my son's birth, my wife and I weren't financially prepared. We had been saving up for over a year to pay for the hospital bill. But we didn't anticipate how much it would cost for regular trips to the OB/GYN and other common expenses you incur as you get ready for a new child.
As my wife's due date grew closer, I began to panic. In November 2014, however, I learned that my company offered an FSA. As I did some research, I also learned that you can use these pre-tax FSA funds to pay for certain eligible medical expenses. These expenses include the costs of my wife's delivery and hospital stay.
In 2015, you could contribute up to $2,550 to an FSA (the FSA contribution limit is $2,700 in 2019) and my employer at the time offered to match up to $1,000 in my contributions (which could be in excess of the limit, although I stuck with the $2,550).
I'd get the $2,550 up front in an account with a debit card, and I'd make my portion of the contributions over the course of the year. This meant that my employer would deduct $129.17 from my paychecks every month to "fund" the account (based on my portion of $1,550).
My son was born in February of that year, and after we drained our FSA, we were only on the hook for a few hundred dollars more. Fortunately, we had enough cash in the bank to pay the remainder of the bill.
Because of the way FSAs are designed — we got the full $2,550 at the beginning of the year — paying for my son's birth was a lot less stressful.
If we didn't have an FSA, we would have needed to get on a payment plan with the hospital. This process would have required us to shift around our budget and remember to make payments each month.
But with the FSA, I was able to pay the bill in full as soon as I got it. And while we were still technically making "monthly payments" through the FSA contribution from my paycheck, we had already adjusted our budget to accommodate the deduction.
That's not even mentioning the fact that the FSA funds were from pre-tax contributions, which saved us a few hundred dollars in taxes.
The bottom line
FSAs aren't for everyone, but the way they're designed can make it easy to manage your medical bills. By getting access to the full annual contribution at the beginning of the year, you don't have to worry about how you're going to cover unexpected health care costs. And if you're already anticipating some health care costs, it can make it easier to plan for them.
In the end, the important thing is that you can afford your medical bills, and an FSA can help you do that.
New to FSAs? Need a refresher course in all things flex spending? Our Flex-Ed column gives you a dose of FSA Living 101, offering tips for making the most of your tax-free funds. Look for it every Thursday, exclusively on the FSAstore.com Learning Center.
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