FSAs Are More Flexible Than Ever, Thanks To New IRS Regulations
These last few months have brought about a lot of unforeseen changes, not only to our daily lives, but also to our personal budgets.
If you are currently struggling with an under/overfunded flexible savings account (FSA), don’t worry —you’re certainly not alone. But luckily, FSAs are about to get even more flexible, thanks to some temporary (and permanent) changes recently instituted by the Internal Revenue Service in response to the coronavirus pandemic.
The new IRS notices in question (2020-29 and 2020-33) will allow account holders to make new elections mid-year, carry more money into 2020, and increase or decrease their FSA elections for medical spending and dependent care. Here’s what these changes could mean for you:
Utilizing Your Flexible Spending Account
Although FSAs are by their nature “flexible,” the rules and regulations that historically govern them can be somewhat limiting. Generally speaking, you have to decide at the beginning of each contract year how many pre-tax dollars you want taken out of every paycheck, all of which will go towards covering eligible expenses. If you budget correctly, this can be an amazing tax benefit. However, if you under- or overbudget, you could lose out, since most plans are currently limited to a $500 carryover.
Not only has the IRS raised the carryover to $550 for the 2020-2021 plan year, they have also given employees more flexibility by providing the opportunity for mid-year elections. In regards to general health coverage, that means that employees who initially declined employer-sponsored health care may be able to reconsider. With respect to FSAs, employers will have the option of offering mid-year changes to elections, whether that means making new elections, or increasing or decreasing a previous election.
How will this help you adjust your spending? If, for example, you were electing to save money for your dependents (let’s say on summer camp), the new rules allow you to rethink whether that money would be best contributed elsewhere (if, for example, the summer camp is closed). Alternately, if you were planning on spending the money on something like a non-urgent elective surgery, you might decide that it’s best to keep that money in your paycheck this year, and put that money in your FSA in a year or two, when you’re sure the surgery can go ahead.
It’s important to note that not only are FSA contributions more flexible this year, what your FSA actually covers is more flexible too, thanks to the CARES Act. For more information on that, read about relaxed regulations here.
How Employers Can Help
Although FSAs are regulated through the IRS, it is important to note that all of these changes are optional — in order to take advantage of them, your employer will first have to determine which (if any) mid-year or end-of-year changes they would like to offer.
In light of the recent IRS announcements, employers looking to amend their FSA programs should do one of the following: either partner with a third-party provider that will help manage their benefits, or ensure that they have drafted a clear and concise plan of action with their FSA provider, and distributed it to their employees.
If employers opt to design a program themselves, they will have plenty of considerations to make. For example:
Whether their FSA will now allow mid-year increases, decreases, cancellations, or all three. In the case of decreases, some employers may find it wise or necessary to institute a limit on the amount eligible to be decreased.
Whether employees will be able to submit/incur claims for 2020 after December 31st, and for how long after.
Whether new elections or changes to elections will be allowed in regards to the employer’s health insurance plan
Overall, the most important thing for employers to remember is that employees lives are uncertain enough at the moment — so their FSA coverage shouldn’t be. When disseminating important healthcare information, make sure it’s easy for employees to understand and to take advantage of the benefits you’re offering.
For questions about how to demystify healthcare benefits, or what FSAs can offer your employees, feel free to contact us at firstname.lastname@example.org.