Now is the time for your employees to start planning on taking full advantage of their employer’s health flexible spending arrangement (FSA) during 2020. Employees may contribute up to $2,750 during the 2020 plan year, which is a $50 increase over 2019. Employees who want to contribute to an FSA must make that choice for 2020, even if they contributed in 2019. Self-employed individuals are not eligible.
FSAs allow employees to use tax-free dollars to pay medical expenses not covered by other health plans. Eligible employees need to decide how much to contribute through payroll deductions before the plan year begins, so many employers are offering their employees the option to sign up now for participation next year.
Amounts contributed are not subject to federal income tax, Social Security tax or Medicare tax. If the plan allows, the employer may also contribute to an employee’s FSA.
Throughout the year, employees can use the FSA funds to pay qualified medical expenses not covered by their health plan, including co-pays, deductibles and a variety of medical products and services ranging from dental and vision care to eyeglasses and hearing aids. Interested employees should check with their employer for details on eligible expenses and claim procedures.
Under the use-or-lose provision, participating employees must incur eligible expenses by the end of the plan year or forfeit any unspent amounts. However, employers may choose to offer participating employees more time through either the carryover option or the grace period option:
- Under the carryover option, an employee can carry over up to $500 of unused funds to the following plan year — for example, an employee with $500 of unspent funds at the end of 2020 would still have those funds available to use in 2021.
- Under the grace period option, an employee has two and a half months after the end of the plan year to incur eligible expenses — for example, with a plan year ending on December 31, 2020, an employee would have until March 15, 2021 to use funds.
Employers can offer one of these two options, or none at all. Employers are not required to offer FSAs. Interested employees should check with their employer to see if the employer offers an FSA. More information about FSAs can be found in Publication 969, Health Savings Accounts and Other Tax-Favored Health Plans.
