New Rules for FSAs and HSAs in Light of COVID-19 and Tax Season

Flexible spending accounts (FSAs) and health savings accounts (HSAs) provide valuable tax benefits for your employees, but they provide even more value when employees are up to date on how to use them.

As the tax filing deadline1 approaches, it’s helpful to remind your employees — and yourself — about how these accounts work, and what FSA rule changes and HSA rule changes apply for 2020.

Flexible Spending Accounts: 2020 Rules

The FSA rule changes for 2020 include an extra $50 in allowable contributions: Employees can set aside up to $2,750 in an FSA this year. Employees who use FSAs had to make their contribution elections before the start of the plan year. Otherwise, they can generally only make election changes if they experience a qualifying life event.

If your business allows employees to carry over FSA money, they can also use up to $500 of unused funds in their FSA from 2019. This money can be used in addition to whatever they contribute in 2020. Some employers allow a grace period instead, giving employees up to 2.5 months after the end of the plan year to use any money that remained in the account. (Most plans follow the calendar year, so that deadline was March 15 in most cases.)

Plans can also offer a run-out period, which gives employees 90 days after the end of the plan year to submit receipts for reimbursement. If your plan offers a run-out period, it likely ends in late March.

In the midst of the COVID-19 pandemic, it’s important for employees to know that the full amount they elected to contribute to their FSAs this year is available for them to withdraw at any time during the year. Under a recent bill, over-the-counter drugs, some medical supplies, and menstrual products are now covered expenses, according to an NPR article. This FSA benefit always applies, not just during the crisis, but it may reassure employees who are worried about the higher chance they’ll need medical services during the year.

Health Savings Accounts: 2020 Rules

In 2020, employees who have HSA-qualified high deductible health plans (HDHPs) can contribute up to $3,550 to an HSA if their HDHP covers just themselves, or up to $7,100 if their HDHP also covers at least one other family member. Employers can also make HSA contributions, although the total amount contributed to an employee’s account from all sources combined cannot exceed those thresholds. If employees choose to dedicate a portion of their paycheck to an HSA, the contribution is made pretax, meaning it’s not subject to income tax or payroll taxes. Employer contributions to employees’ HSAs are also made pretax, and employers can deduct the contribution as a business expense.

Unlike FSAs, employees can make changes to their HSA contributions at any point during the year. Contributions can be spaced out across the whole year’s paychecks or made in one or more lump sums. But unlike an FSA, employees can only withdraw money from an HSA if it’s actually in the account. In other words, an employee cannot open an HSA in January, elect to contribute $3,550 over the course of the year and then withdraw $3,550 in March after only having contributed several hundred dollars to the account. But also unlike an FSA, unused money in an HSA rolls over from one year to the next without any restrictions.

In a new rule change issued by the IRS in response to the COVID-19 pandemic, HDHPs are allowed to pay for COVID-19 testing and treatment before enrollees have met the minimum deductible without jeopardizing the plan’s HDHP status. As with the FSA plans, HSAs can be now be used for some over-the-counter medications and menstrual products.

Another benefit of HSAs, and one that comes into play during the tax filing season, is that contributions can be made at any time up until the tax filing deadline, which is roughly April 15 of the following year. If any employees who had HDHP coverage in 2019 didn’t maximize their contributions, remind them that they still have time to do so.

The 2019 HSA contribution limits were $3,500 for people with self-only HDHP coverage and $7,000 for those with HDHP coverage that included at least one other family member. Any or all of that money can be contributed at any time until the tax filing deadline for 2019 tax returns, resulting in a lower total tax burden for 2019. Maximizing HSA contributions will also help to ensure that employees have money available in their HSA in case they need to cover medical expenses, either this year or in the future.

Keeping Up With FSA Rule Changes and HSA Rule Changes Year to Year

If you offer FSA or HSA benefits to your employees, you’re aware that the rules change from one year to the next. HSA-qualified health plans have to keep up with annual rule changes for minimum deductibles and maximum out-of-pocket caps, and the contribution limits for both types of accounts are adjusted annually to keep up with inflation. Helping your employees understand how these plans work is a great way to help them maximize the tax advantages that are available to them and give your workforce a firm foundation for financial health.

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1. This year’s tax-filing deadline has been moved to July 15.

COVID-19 Resources: Managing Your Business During a Crisis