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.