Important facts about flexible spending accounts (FSAs)

Flexible spending accounts provide you with a smart way to save money on health care and dependent care expenses (depending on the type of FSA you’re enrolled in). When you participate in an FSA, you’re putting money aside before it is taxed so you can save on eligible expenses. There are many advantages of these pre-tax savings account, but they do come with limitations. Here’s what your employees need to know as they prepare for the year to come.

4 types of FSAs

A medical FSA covers eligible general-purpose health expenses and can be used for qualified expenses such as prescription drugs, insurance copayments and deductibles, and medical devices, among other expenses.

A limited medical FSA covers qualifying dental, vision, and preventative care expenses.

A combination FSA (sometimes referred to as a post-deductible FSA) allows a participant to pay for qualified vision, dental, and preventative care expenses until they’ve met the IRS deductible. Once the deductible has been met, their account converts into a medical FSA and more expenses will be eligible.

A dependent care FSA helps participants save money on eligible dependent care services, such as child (under age 13) or adult daycare, before or after school programs, summer day camp, and more!

Please note: A limited medical FSA or combination FSA can be paired with a high-deductible health plan (HDHP) and health savings account (HSA).

Contribution limits

The IRS recently released 2022 contribution limits for medical FSAs and more as part of RP-2021-45. These limits apply to limited and combination FSAs as well. In 2022, contribution limits for FSAs will be $2,850 up $100 from 2021’s limit of $2,750.

Dependent care FSA limits for 2022 were not announced as part of RP-2021-45. The American Rescue Plan Act of 2021 did include a temporary increase, for 2021, in the maximum amount that can be contributed to a dependent care flexible spending account from $5,000 to $10,500. As mentioned, this increase was temporary.

Grace period

A grace period is the amount of time after a plan year has ended for you to incur expenses for the previous plan year. If your employer has a grace period, that allows participants up to 2 ½ months past the plan year’s end date to incur these expenses.

For example, if your FSA’s plan year runs from January 1, 2021, through December 31, 2021, that means you would potentially have until March 15, 2022, to incur eligible expenses for your FSA’s 2021 plan year.

Run-out period

A run-out is an extension past the last day of the plan year to give you more time to file for reimbursement of claims incurred during the plan year.

Use-or-lose rule and carryover

FSAs are governed by the IRS’ use-or-lose rule. The rule states that any funds in an FSA must be spent by the end of the plan year or be forfeited to the plan. There are exceptions to this rule including run-out and grace periods as mentioned earlier providing additional time for participants to incur expenses or file for reimbursement.

Another exception comes in the form of carryover. Carryover is the balance a participant can carry over from their FSA to the following plan year. Per IRS regulations, employers can offer up to a $570 carryover of remaining 2022 funds into 2023 (up from $550 in 2021).

Election

A participant’s election is the amount of funds they choose to have available in their FSA during the plan year. Elections will be deducted from an employee’s paycheck on a regular basis throughout the year. Elections are subject to the contribution limits.

Eligible expenses

Expenses that are eligible for reimbursement from an FSA will vary depending on the terms of the employee benefit plan, including the type of FSA that is offered and elected by the plan participant. A comprehensive list of expenses that are FSA eligible can be found here. Some unexpected eligible expenses include feminine hygiene products, mental healthcare, alternative therapies, and fertility tests and treatments.

Melanie Tinto is chief human resources officer at WEX Inc.