Deciding how much to contribute to your Flexible Spending Account (FSA) at the beginning of your plan year can feel like it’s half fortune telling and half science. The good news is that two policies: the FSA Rollover and the FSA Grace Period can help alleviate the stress of choosing the exact correct amount to contribute to your FSA each year.
FSAs are savings accounts into which you can deposit pre-tax money in order to pay for qualified medical expenses. They must be employer-sponsored (meaning they aren't available in the private market), but unlike HSAs, they aren’t tied to a specific type of health insurance plan.
You must choose the annual amount you want to contribute during your open enrollment period and your employer will then deduct the appropriate amount from each paycheck. If you want to change your elected contribution levels outside of open enrollment, you can typically do so only if you’ve experienced a qualifying life event like getting married or having a child.
There are three types of FSAs:
- Healthcare FSAs
- Dependent Care FSAs
- Limited Purpose FSAs.
Contributions to Healthcare FSAs are intended to help participants pay for out-of-pocket medical expenses (i.e. qualified medical expenses) that include, but are not limited to: deductibles, copays, prescriptions, over-the-counter drugs for which you have a prescription (insulin refills don't need a prescription), out-of-pocket dental and vision care, crutches, blood sugar test kits and bandages. You can’t use your contributions to pay for health insurance premiums, over-the-counter drugs without a prescription, long-term care or any expense covered under your health insurance plan.
Dependent Care FSA
Dependent Care FSAs were created to help working parents and caregivers pay for child or adult daycare of dependents who live with them the majority of the time. The care for which contributions pay must be essential to allowing the parent(s) and caregivers to work or look for work (so no date nights). The list of allowable expenses includes: nannies, babysitters, daycare, preschool, summer day camp, and before and after school care for children under the age of 13; and adult daycare for a spouse, parent, or other relative who is physically or mentally disabled.
Limited Purpose FSAs
Limited Purpose FSAs can only be used to pay for out-of-pocket dental and vision expenses.
FSA Contribution Limits, Expirations and Rollovers
The FSA contribution limits, which are set by the IRS each year, for the three types of FSAs are as follows:
- Healthcare FSA: $$2,850 in 2022 and $3,050 in 2023. You can use this money to pay for medical expenses for you, your spouse and any dependents which you claim on your tax return. If both you and your spouse have an FSA, you can each contribute up to the maximum contribution limit.
- Dependent Care FSA: $5,000 for a married couple filing jointly, or $2,500 for each individual FSA if you each have a separate account.
- Limited Purpose FSA: $2,850 in 2022 and $3,050 in 2023, and you can use this money to pay for you, your spouse and your dependents.
Until 2012, there were no such things as FSA rollovers or grace periods. If you didn’t spend your total contributed amount by the end of your plan year, you forfeited any remaining funds back to your employer. But this led to wasteful spending at the end of each plan year as participants raced to find something on which they could use their leftover savings. But then the IRS and Treasury Department made a rule change that truly benefited people contributing to these types of accounts.
Now, employers have the option to EITHER allow employees to rollover up to $550 of FSA savings to the following plan year in 2021 and $570 in 2022 OR they can give employees a 2 ½ month grace period following the end of the plan year during which employees can use any remaining funds. Here are a couple of examples of how this works:
Example 1: The FSA Rollover
Let’s say Drew has contributed the maximum annual amount to his FSA account ($3,050 in 2023) but he’s only used $2,000 of it by the end of his plan year. Let’s also say, Drew’s employer allows him to rollover up to $610 (the IRS maxmium for 2023) of unused funds to the following year and Drew elects to take advantage of this. That means that Drew will start the following plan year with a $610 balance in his FSA (plus any money his employer contributes at the beginning of the year) but he will forfeit the remaining $440. He can then choose to contribute up to the maximum allowed for that year or he can adjust his contributions to account for that rolled over amount.
Example 2: The Grace Period
Natasha has planned to contribute the maximum amount to her FSA ($3,050 in 2023) and her plan year ends December 31st. By November 15th, she’s only used $1,150 of her contributions. Without a grace period, Natasha might be scrambling to try to find ways to spend the remaining $1,900. But since her employer does give employees a 2 ½ month grace period, she has until March 15th to use her remaining FSA balance. Because of this, she’s able to schedule an elective procedure for January for which she uses her previous year balance to pay for the related out-of-pocket expenses.
The Run-out Period
Not to be confused with the FSA rollover or grace period, the FSA run-out period is the period of time your employer may offer for you to submit claims for expenses after the plan year ends, for expenses incurred during the plan year.
How do I know if my FSA allows rollovers?
It’s up to your individual employer whether or not they want to allow you to rollover any of your contributions. So to find out if your plan allows for this, contact your HR Department or FSA administrator. If you have any other questions regarding FSAs, check out Lively’s FSA guide.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.