How Does FSA Rollover Work? Answers to Common Questions

The American Rescue Plan Act gives employers the option to raise these limits for 2021. Explore how to effectively manage your FSA with insights on grace periods and rollover options to maximize your tax savings and benefits. You can use the funds in your flexible spending account to reimburse yourself for medical expenses, but you will need to keep track of receipts and payments, and make sure that they are qualified expenses.

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March 15 marks the end of the two-and-a-half-month grace period to spend down remaining FSA funds, for enrollees in FSAs that have adopted the grace period option. “As the end of the grace period and claims filing deadlines for 2020 calendar year plans are approaching, it is important that employers act quickly,” said Kim Tippens, senior director for benefits accounts at consultancy Willis Towers Watson. “Ideally, decisions should be made at least several weeks before these deadlines to allow time for participant communications and system updates,” she said. Under IRS guidance issued in May 2020, plan sponsors could allow health and dependent care FSA participants to make midyear contribution changes and increased the carryover limit permitted for health FSAs through the end of 2020. Zinter raised another point regarding employers that might adopt one of the FSA carryover provisions without also allowing employees to adjust their FSA contribution elections. Health FSAs have an additional option of allowing participants to roll over up to $550 of unused funds at the end of the plan year and still contribute up to the maximum in the next plan year.

FSA Rollover and Renewals: Helpful Answers to Common Questions

“In practice, employers who rely on some forfeitures to help defray the cost of the plan may see less forfeit money if terminated employees can submit claims throughout the plan year,” she noted. Employers must carefully evaluate whether to include the rollover feature in their FSA offerings. This decision affects employee satisfaction and the appeal of the overall benefits package.

If you elected to contribute $2,600 for a year, but only spent $2,300, you could carry over the remaining $300 to use next year. Keep in mind, if you only spent $1,000, you could still carry over $610, but you would lose the remaining $990. The IRS has increased limits for 2025 tax-savings accounts for both Health Savings Accounts (HSA) and Flexible Spending Accounts (FSA).

• For instance, rolling over $610 preserves its tax-advantaged status for future medical costs.
• “In practice, employers who rely on some forfeitures to help defray the cost of the plan may see less forfeit money if terminated employees can submit claims throughout the plan year,” she noted.
• But what happens if you don’t use all the money in your account during the calendar year?
• The grace period can be up to a maximum of 2.5 months after the start of the new year, which would be March 15th of the year after your contributed.
• If you’ve missed the Open Enrollment Period for health insurance, you may still have options to…
• Clear communication of tax advantages can boost employee participation and appreciation of FSA benefits.
• Clear communication of these rules is essential to prevent misunderstandings.

“As a result of COVID-19, participating employees are more likely to have unused health FSA or dependent care FSA amounts at the end of 2020 and 2021,” the IRS announcement said. FSAs are only offered through employers, so if you’re unemployed or self-employed, you can’t open one. HSAs, on the other hand, are individual accounts, which means anyone can establish one. These accounts can be set up through a qualifying financial institution. To determine your FSA contribution for a year, estimate these expenses based on what you spent in previous years. Be sure to take into consideration whether anything will be different this year (dental work, new family members, etc).

Help Save Money for Medical Expenses With an FSA

A limited-purpose FSA is similar to a regular health FSA, but you can only use an LP-FSA to help pay for eligible dental and vision expenses. A flexible spending account (FSA) is an account that’s funded with pre-tax money you can spend on qualified expenses. There are different types of FSAs that can help you pay for different qualified expenses like deductibles, copays, and other expenses.

Per IRS guidelines, up to $500 of any unused dollars left in your FSA account at the end of the year can be rolled over and used in the subsequent year for eligible expenses. The rollover amount does not count towards the annual election limit of $2,700. A Flexible Spending Account (FSA) is a special account you put money into that you use to pay for certain out-of-pocket healthcare costs. You don’t pay taxes on this money, which means you’ll save an amount equal to the taxes you would have paid on the money you set aside. At a time when some people may be cash-strapped, this newfound flexibility should be welcome news. Suspending contributions to a Flexible Spending Account and/or dropping under-utilized coverages will help struggling employees manage expenses.

Managing Health Care Costs in 2025 for Employers & Employees

Transparent communication about rollovers, especially before open enrollment, empowers employees to make informed decisions about their FSA contributions. Only plans explicitly incorporating the rollover feature allow unused funds to transfer to the next plan year, up to the specified limit. Employers must detail this option in their plan documents to ensure compliance. Additional eligibility requirements, such as a minimum duration of FSA participation, may also apply.

“All of these options add administrative burden to employers,” blogged Lyndsey Barnett, an attorney with Cincinnati-based Graydon. “If you are considering adding or expanding a carryover or grace period provision, we recommend first reviewing your 2020 health FSA balances to determine if there are that many participants that will even benefit from the relief.” “Plan sponsors that allow the changes should closely monitor for an adverse effect on 2021 DCAP nondiscrimination testing—and take steps to limit contributions for highly compensated employees, as needed.” In 2021, employees can contribute $2,750 to a health FSA, including to a limited-purpose FSA restricted to dental and vision care services, which can be used in tandem with a health savings account (HSA).

• The grace period provision essentially extends the plan year for an additional 2 ½ months, allowing eligible expenses to be incurred over a 14 ½ month time period rather than a 12-month time period.
• If you are currently participating in a Qualified High Deductible Health Plan (HDHP), you are eligible to contribute pre-tax dollars to an HSA.
• Flexible spending allows participants to set aside pre-tax dollars to apply to the upcoming calendar year’s out-of-pocket expenses related to eligible medical, dental, vision, pharmacy and dependent care.
• The HSA differs from the FSA in that it has a higher maximum annual contribution ($3,500), and the money in your account accrues from year to year like a bank account and earns interest.
• Fortunately, your HSA is a portable account, which means even if you quit your job, you can still access the money you’ve saved.

FSAs have historically fsa rollover 2019 been known for their “use-it-or-lose-it” feature. In the past, employees had to forfeit any unused funds at the end of the plan year. In October of 2013, the Department of Treasury issued new regulations which optionally allow employers to include a carryover provision to their FSA.