It’s especially important this year to check the balance in your flexible spending account and know the deadline for using it on health costs because the elastic rules adopted in the pandemic are expiring.
F.S.A.s, as they are called, let workers set aside pretax money from their paychecks for medical and dental care that insurance doesn’t cover. Employers set a deadline — often the end of the calendar year — by which employees must spend the funds or forfeit them.
The federal government let employers relax those rules during the pandemic to give workers more time to spend the money. But now the rules are set to return to normal, and some workers may have more cash than usual that must be spent in the coming months.
Employers already had some leeway to give workers a grace period — a couple of months or so past the deadline — to use the money in their F.S.A. or to let them carry a few hundred dollars into the next plan year. But during the height of the pandemic, many people delayed in-person doctor visits and didn’t spend all the money. The federal government temporarily relaxed the rules in 2020 and 2021, allowing employers to extend spending deadlines by up to a year, or to let workers roll over their entire balance into the next year.
“Employees didn’t have to worry about ‘use it or lose it,’” Mr. Durso said.
Now the more generous rules are expiring, and some workers may be caught off guard, said Rachel Rouleau, chief compliance officer for Health-E Commerce, the parent of FSAstore.com, which sells F.S.A.-eligible items. Workers should check their F.S.A., she said, to see if they have cash that must be spent by Dec. 31 — or, if their employer offers a grace period, typically by March 15, 2023.
It’s unclear how many workers may be affected by the expiration of the expanded F.S.A. flexibility. Not all employers offered extensions and rollover waivers. Federal data suggest that about 16 million workers contribute to an F.S.A., said Jake Spiegel, research associate with the Employee Benefit Research Institute.
For 2020, about two-thirds of Willis Towers Watson’s clients adopted more generous carry-over provisions into 2021 for health care F.S.A.s and dependent care spending accounts, which let workers set aside money for child care, Mr. Durso said. For 2021 into 2022, about a third loosened the rules, he said.
Ms. Rouleau offered a hypothetical example to illustrate how the more generous carry-over rules could have affected a worker with a Dec. 31 spending deadline. (She cautioned that the example was possible but “unlikely,” since most account holders spend more than half their annual election.)
In the example, a worker contributes the maximum of $2,750 to her F.S.A. for 2020. She spends just half but, under the temporary rules, carries over the $1,375 balance into 2021. (Under normal rules, the maximum amount for rollover that year would have been $550.)
In 2021, the worker again contributes the maximum of $2,750. She again spends half, and rolls over the remaining $1,375 — plus the $1,375 from the prior year — into 2022.
In 2022, she contributes the maximum — now $2,850. She has so far spent just half the contribution and has $1,425 remaining.
That adds up to a balance of $4,175 ($1,375 plus $1,375 plus $1,425), but the rules now allow a carry-over of just $570 into 2023. The worker may have to spend $3,605 by the year-end deadline, less than four months away, or risk forfeiting the funds.
Workers with an F.S.A. should confirm various deadlines with their employers, Mr. Durso said. While expenditures must be incurred by the deadline, employers may offer a “run out” period of several months after the deadline, during which workers can still submit receipts for reimbursement.
Here are some questions and answers about flexible health spending accounts:
What can I buy with my F.S.A.?
Employees can use their F.S.A. contributions to pay for a broad range of health services and products, including over-the-counter medication, first-aid kits, blood pressure monitors, breast pumps, and menstrual pads and tampons. Covid-related supplies, like masks and hand sanitizer, also qualify. Less commonly known eligible items include deep massage guns favored by athletes, and the cost of buying and maintaining a guide dog or other service pet. Details can be found in I.R.S. Publication 502.
How does an F.S.A. differ from a health savings account?
Both accounts are used to pay for health and medical costs, but health savings accounts, or H.S.A.s, have different rules. To qualify for an H.S.A., you must first be enrolled in a specific type of high-deductible health plan. You can contribute much more to an H.S.A., and invest it for the long term; there are no deadlines for spending the money; and the account goes with you if you change jobs. F.S.A.s are employer-specific, and the funds can’t be invested.
Are rules for dependent care spending accounts returning to normal as well?
Yes. For 2020 and 2021 only, employers could allow workers to carry over the full balance of their dependent care accounts into the next year. Now that the temporary rules are set to expire, carry-overs again aren’t allowed. The maximum contribution for 2023 is expected to be $5,000 per household.