COVID-19 Relief Law Makes FSAs Even More Flexible

You won’t lose money in your flexible-spending account if pandemic closures made it difficult to spend

piggy bank with mask iStock-1223509804

Among the many provisions in the COVID-19 relief bill signed into law late last year is one that’s good news if you have a flexible-spending account (FSA). If you set aside pretax money from your paycheck to pay for health or dependent-care expenses in 2020, you have until the end of 2021 to spend it. And you have until the end of 2022 to spend the money you put aside this year.

Before the change, FSA money was more strictly use it or lose it. Dec. 31 was typically the use-by date, though some employers gave workers an additional two and a half months to spend down healthcare FSA money or permitted them to carry over up to $550 to the following year.

But as the pandemic forced many people to put off nonurgent medical care, and many medical and dental offices, day care centers, summer camps, and senior centers closed, spending FSA money presented a challenge. Many workers with FSAs found themselves with hundreds or thousands of unspent dollars locked up. The accounts allow people to deduct up to $2,750 pretax from their paychecks for medical expenses and up to $5,000 for dependent-care costs.

More on Flexible Spending Accounts

In fact, more than $500 million in medical and dependent-care funds put aside in 2020 were at risk of being lost, estimates Jody Dietel, senior vice president for advocacy and government affairs at HealthEquity, which manages benefits for 12 million workers at more than 100,000 organizations.

“A lot of people were going to lose money through no fault of their own,” Dietel says. “Congress realized that COVID had an unprecedented impact on people’s ability to utilize these funds for healthcare and dependent-care expenses.”

In a typical year, few people forfeit the money in their FSA, though there's often a rush to spend down those dollars at the end of the plan year. In fact, only 8 percent of participants in medical FSAs administered by HealthEquity forfeited funds as of March 2019, with an average loss of $172.

Dietel points out that while the federal law permits employers to change their flexible-spending account rules, it doesn’t require them to do so. Nonetheless, she expects most companies to adopt the changes. “Employers don’t want their employees to be harmed,” she says.

What's Changing With FSAs

The amount of money you can contribute to medical and dependent-care FSAs remains the same this year as last: $2,750 for medical expenses and up to $5,000 for dependent-care costs. But in addition to rolling over unused funds from 2020 or 2021 to the following year—and giving you until the end of the rollover year to spend it—the new COVID-19 relief law allows other changes. Here are some of them:

You can make contribution changes anytime during the year. Previously, you had to decide during open enrollment—when you sign up for your company’s health insurance plans and other benefits for the coming year—how much to put in a healthcare or dependent-care FSA. You could make changes only if you had a major life event, such as getting married or having a baby.

You can access FSA funds even if you change jobs. Under the old rules, if you left your job, you forfeited the money you’d already contributed to your FSA but hadn’t spent unless you elected to continue using your previous employer's insurance. Now you won’t lose those funds. Worth knowing: Because you have access starting on Jan. 1 to the full amount of FSA money you plan to contribute over the year, if you leave your job and have been reimbursed for more than you already contributed, you don’t have to repay those funds either, as long as you spent the money on qualifying expenses.

You can use your dependent-care dollars on expenses for children up to 14 years old. Under the old rules, you couldn't use FSA money to pay for the care expenses of dependent children after they turn 13. Raising the age limit means parents with kids whose expenses would have qualified in the previous year don't have to worry about them aging out.

You can use your FSA for a broader array of medical expenses. This is a benefit not from the most recent COVID-19 relief bill but one that Congress passed last March, the Coronavirus Aid, Relief and Economic Security (CARES) Act, which made a permanent change to FSA rules. That law expanded the list of eligible items you can spend FSA dollars on to include over-the-counter medications such as cold medicine and ibuprofen, as well as menstrual products such as tampons and pads.

Not every organization that offers flexible-spending accounts will make all those changes. So check with your human resources department to see which ones your company is planning to adopt. Employers have plenty of time to implement the changes. Organizations can amend 2020 plans until Dec. 31, 2021, and until Dec. 31, 2022, for current-year plans.

And while the new rules apply only to FSAs for 2020 and 2021, Jody Dietel from HealthEquity hopes the temporary moves will pave the way for permanent changes. “These accounts aren’t tax shelters for the rich," she says. “People use this money to defray the cost of medical care and child care, which are big expenses for a lot of people.”

Donna Rosato

As a journalist on the special projects team at Consumer Reports, I investigate issues that affect consumers' health, finances, privacy, and safety. My particular focus is on helping people untangle problems with medical bills, cover steep healthcare costs, finance the skyrocketing cost of college, and manage student debt. I was previously a writer at Money magazine, wrote for The New York Times and was a business reporter at USA Today. If you have a tip, follow me on  Twitter (@RosatoDonna).