Healthcare flexible spending accounts have valuable tax benefits but strict use-it-or-lose-it rules. If your employer offers an FSA, you can contribute up to $2,750 pretax in 2020 (and 2021) and use the money tax-free for a wide range of medical expenses. But most FSAs have a Dec. 31 deadline for using the money (some have a grace period to March 15 or let you carry over $550 from one year to the next). If you don’t spend the money by the deadline, you lose it. This can lead to a year-end rush to the drugstore, dentist and eye doctor to drain the account before the money goes away. And more people are scrambling now because 2020 ended up being very different than anyone imagined when they set their contributions for the year.
“2020 has been a trying year for FSA users who had limited opportunities to visit the doctor’s office for checkups and direct medical concerns, not to mention elective surgery being delayed for much of the year,” said Preston Farrington, CEO of Health-E Commerce, the parent brand to FSAStore.com, which sells FSA-eligible items online. It found that 50% of FSA users expect to have more FSA funds to spend this deadline period than they did last year.
But the IRS and Congress have made some key changes to the FSA rules to help people avoid losing the money.
“As a response to the public health crisis, the IRS made the unprecedented decision to open up FSA mid-year changes to account holders,” Farrington said. You usually can’t make changes to your FSA contribution amount after the year begins except in certain circumstances, such as if you get married or have a child, but 29% of the employers surveyed by benefits consulting firm Mercer in June 2020 allowed employees to make mid-year changes to their healthcare FSAs.
You also have new ways to spend FSA money, thanks to the Coronavirus Aid, Relief and Economic Security Act (CARES Act), and other little-known strategies to help you make the most of these accounts.
1. New rules for over-the-counter medicine: Starting in 2011, you could only use money in an FSA for over-the-counter medicine if you had a prescription. But the CARES Act changed the rules. You don’t need a prescription to make tax-free FSA withdrawals for over-the-counter drugs, such as pain relievers, allergy medications, acne medicines, cold and cough medicines and antacids. (Some employers needed to amend their plans to permit this change.)
2. New rules for menstrual products: The CARES Act also changed the rules to permit tax-free FSA withdrawals for menstrual and feminine hygiene products (such as tampons, pads and liners), which weren’t eligible expenses in the past.
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3. Eligible drugstore items: Many people don’t realize that you can also use FSA money for certain drugstore items that don’t have an active medical ingredient. “Consider purchasing medical supplies such as thermometers, blood pressure monitors, reading glasses and band-aids,” said David Speier, managing director of benefits accounts at Willis Towers Watson, an employee benefits consulting firm. You can also use FSA money for sunscreen with an SPF of 15 or higher, bandages, first-aid kits, breast pumps, heating pads, knee and back braces, contact lens solution, oximeters and other eligible items (click here for a list).
4. Out-of-pocket medical and drug expenses: You can use FSA money for your insurance deductible and co-payments, and some medical expenses that may not be covered by your insurance, such as acupuncture and chiropractic care. You can also use it for your out-of-pocket costs for prescription drugs.
5. Vision, dental and hearing care: You can use FSA money for vision, dental and hearing care that isn’t covered by insurance, such as your out-of-pocket costs for eye exams, LASIK, glasses, prescription sunglasses, contact lenses, contact lens supplies, dental exams and procedures, orthodontics and hearing aids.
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