Flexible Spending Account Carryovers
FSAs can be fantastic tools to essentially get a discount/deduction on health care and/or dependent care. And there’s a temporary rule in effect for 2020-2021 that can allow even more flexibility.
First, what's an FSA?
An FSA is a Flexible Spending Account (or Flexible Spending Arrangement, in IRS parlance).
If you use an FSA at work, you get to save pretax dollars from your paycheck to cover health care expenses that insurance doesn't reimburse.
You can also do the same for dependent care expenses such as childcare if you set aside money via a Dependent Care FSA.
Is there a limit?
Yes.
You can contribute up to $2,750 to your Health Care FSA in 2021 ($2,850 in 2022), and usually up to $5,000 to your Dependent Care FSA (temporarily increased to $10,500 for 2021). That can add up to real tax savings.
These contributions are made pretax, which means you don’t have to pay Federal, state, or FICA (Social Security and Medicare) taxes on that amount.
For example, if you're in the 24% Federal income tax bracket, with a state-level income tax of 9.3% (hi, California!), not paying taxes on $2,750 means an extra $950-$1,120 in your pocket from tax savings (depending on whether you’re past the Social Security contribution limit).
If you contribute and use the max in both a Health Care FSA and Dependent Care FSA (the “normal” $5,000 max), that’s a nice, tidy $2,690-$3,170 in tax savings.
What if I don't spend the FSA money?
Usually, these accounts are of the "use-it-or-lose-it" variety, which means if you don't use the money by the end of the year, the money goes back to your employer.
Some employer plans give flexibility on this. The two types of flexibility are:
Many plans give you until March 15th of the following year to spend the money.
Many plans allow you to carry over a certain amount from one year to the next (a max of $550 from 2021 to 2022).
What's different this year?
This year, there is a temporary relaxation of the "use-it-or-lose-it" rules. However, it may or may not apply to you.
The change is that the IRS is allowing employers to eliminate the carryover restrictions for 2020 and 2021, for both Health Care FSAs and Dependent Care FSAs.
The rules were relaxed due to the possibility that more people may have unused funds in their FSAs due to COVID-related restrictions, lockdowns, etc.
However, your employer had to opt into the change for it to apply to you. If they did, then you can carry over your entire unused FSA balance into 2022. So if you still have $1,500 sitting in there, it can all be carried over to 2022 if your employer opted in.
Bottom line for me?
This is fantastic news if you haven't spent all the money in your FSA(s) yet. Being able to carry it over is much better than potentially losing it completely.
It also means you might have a lot more in the account next year than you had planned. And, at least as of now, the carryover restrictions will be back in place next year (raised to a max of $570 to be carried over from 2022 to 2023 for certain employers).
But, as mentioned above, if your employer didn't opt into the change, then you won’t benefit from this. You'll need to contact your employer's benefits team to ask whether it applies to your FSA.