Know your Flex Spending Account Rules
Year-end is the time to review your Flexible Spending Accounts, also known as FSAs. Not all plans use a calendar year, but many do.
These are workplace accounts that allow you to payroll deduct funds pre-tax throughout the year and pay for specific expenses such as childcare and medical expenses during the year with tax-free dollars.
The FSA should not be confused with a Health Savings Account. The FSA is a totally different account with different rules, although both allow out-of-pocket medical expenses to be paid with tax free dollars.
Use it or Lose it
In the past one of the drawbacks to the FSA was the “Use it or Lose it” rule. The money set aside during the plan year had to be spent before year-end or it would be forfeited. That was a deterrent and discouraged many employees from participating in what otherwise is a great tax strategy.
Changes by the U. S. Treasury Department have made FSAs more user friendly. Employers may offer one of the following options, but not both. In some cases, employers do not offer either of these more flexible options. So, it is very important to know your own plan rules to avoid risk of forfeiture.
Carryover Rule
This option, when it is included in your plan, allows employees to carryover up to $550 in their FSA in 2020 to the next plan year. This provides welcome relief from the Use it or Lose it provision.
Grace Period
Secondly, some employers offer a grace period of two and a half months after the close of the plan year to use the money in the employee accounts. Like the Carryover Rule, this provides employees more flexibility in using their tax-free funds.
Dollars in your FSA are meant to be used for current expenses. Know when your plan year ends and whether or not your plan offers one of these more flexible options. Be sure to use the balance in your account before it is forfeited.
Look at your 2021 anticipated expenses and enroll in your open enrollment period for the new year.
Written by Connie C. Guelich, CFP, AEP, CLU, ChFC. This represents our views at the time of this writing, and it is subject to change. It is not intended to be personal investment advice. If you would like to discuss your own account, please don’t hesitate to call us.