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FSA and HSA plans under the American Rescue Plan

Laura Culp

Sep 30 2021

2 min read

Under the American Rescue Plan (ARP) and the Consolidated Appropriations Act (CAA), participants of Flexible Spending Accounts and Health Savings Accounts may see new saving opportunities. Available relief, according to Notice 2021-15, includes:

HEALTH SAVINGS ACCOUNT (HSA) & FLEXIBLE SPENDING ACCOUNTS (FSA) CONTRIBUTIONS

HSA and health FSA pre-tax contributions can be used to cover out-of-pocket medical, dental and vision expenses. The earnings of these accounts are not taxed, as long as the funds are used for qualified medical expenses. In fact, some individuals choose to use HSA accounts to pay for medical expenses in retirement by contributing each year and investing the funds but not withdrawing until they retire. It should be noted that to be eligible to contribute to an HSA, you must be covered by a high deductible health plan.

Unlike HSA accounts, FSA (health FSAs and dependent care assistance plans) account contributions must be spent in the year of contribution. Though, health FSA plans may permit a grace period of up to two and half months after the plan year-end. Health FSA plans may also permit employees to carryover $500 (indexed) to the next plan year.

Under the new relief, plans can be amended to allow participants to carry their FSA account balances, health and dependent care over to the next year with no dollar limit for plan years 2020 and 2021. Additionally, employers, can provide a grace period of 12 months on top of the carry-over relief for both types of FSA accounts. Employers can choose to adopt these changes for one FSA plan but not the other, if they wish.

Certain contribution limits were also increased under the ARP. Dependent care contributions were raised from $5,000 to $10,500 for the plan year 2021. HSA limits did not change. Lastly, an employee can amend their health FSA and dependent care contributions without a change in status for the plan year 2021. HSA contributions can be changed during the plan year without a change in status.

TAX SAVING OPPORTUNITIES

With new relief provided by the IRS, employers and employees may see changes to their savings programs. It is highly encouraged to take advantage of the tax relief this year. For more information, please talk to our team.

This publication contains general information only and Sikich is not, by means of this publication, rendering accounting, business, financial, investment, legal, tax, or any other professional advice or services. This publication is not a substitute for such professional advice or services, nor should you use it as a basis for any decision, action or omission that may affect you or your business. Before making any decision, taking any action or omitting an action that may affect you or your business, you should consult a qualified professional advisor. In addition, this publication may contain certain content generated by an artificial intelligence (AI) language model. You acknowledge that Sikich shall not be responsible for any loss sustained by you or any person who relies on this publication.

About the Author

Laura Culp

Laura Culp, CPA, PFS, MT, CCIFP, is a director with more than 30 years of experience working with the owners of privately held businesses to help them grow their wealth and implement tax saving strategies. Her extensive knowledge of the unique tax and financial issues that contractors and developers face is valued by her construction and real estate clients. Laura’s planning and wealth management skills provide clients with an integrated level of service, and clients appreciate her down to earth advice.