Check your employer’s FSA policies during open enrollment to avoid surprises
The federal government made some key changes to flexible spending accounts (FSAs) for the 2020 and 2021 plan years. If your employer adopted any of these temporary rules, there could be major implications for your FSA plan going into 2022. FSA carryover limits are expanding for 2022 and there are longer FSA grace periods, which will give you more time to spend any FSA money you don’t use by the end of 2021. Also make sure to get your elections right during open enrollment, because you will need a qualifying life event in order to change your FSA elections midyear.
During the 2021 open enrollment period, make sure to review the details of your employer’s FSA plan so you know the exact rules and contribution limits for your plan in 2022.
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In 2021, employers have the option to amend their FSA plans to allow employees to carry over all or part of their unused balances into 2022. Carrying over funds from 2021 does not affect your annual contributions for 2022. You can still elect to contribute up to the annual limit set by the IRS. Any unused funds you carry over will be available on top of your annual contribution. The expanded carryover rules will not extend into 2023.
“The Consolidated Appropriations Act permits employers to allow participants to roll over unused funds from 2021 to 2022,” says Drew Feutz, certified financial planner at Market Street Wealth Management Advisors. Previously the maximum allowed carryover limit was $550, he says.
This means you won’t have to rush to spend unused funds by the end of the year to avoid losing them (unless your employer limits the amount you can carry over, in which case you would need to spend any funds above that limit to avoid losing anything).
When it comes to 2022 planning, you can consider using carryover funds for additional medical expenses. For example, you may opt to get a new pair of glasses in 2022 if you have a few hundred extra dollars in your account. You could also opt to contribute less in 2022 than you normally would and let the carryover make up the difference, putting a few bucks back in your paycheck.
Ultimately, the amounts you should carry over and contribute depend on how much you anticipate spending on out-of-pocket medical expenses in 2022. Check the balances in your FSA so you know how much you stand to carry over if your employer allows it.
FSA grace periods give you a little extra time to spend funds that went unused by the end of the plan year. Typically, FSAs that allow grace periods give you 2½ months after the end of the plan year to spend your unused contributions. For 2021 employers have the option to extend the grace period to 12 months, giving you all of 2022 to spend unused funds.
This is where carryovers and grace periods start to bleed into one another. Although they’re technically different options, a 12-month grace period is effectively a carryover of funds. Either way, the same concept applies and you need to plan your 2022 annual contributions accordingly.
Per IRS rules, health FSAs may allow a grace period or carryover (or neither), but not both.
Typically, you can only enroll in an FSA or make changes to your contribution amount outside of open enrollment if you experience a qualifying life event (QLE) such as getting married, having a child, the death of a dependent, or a change in employment.
For 2021, employers had the option to waive this requirement and allow employees to make midyear changes at any time. This rule change is expiring at the end of the year and things will be back to normal, Feutz says. So if your employer allowed midyear election changes without a QLE in 2021, don’t expect the same flexibility next year. If you don’t anticipate experiencing a QLE in 2022, it’s even more important to choose the right election amount during open enrollment.
Health care FSAs and dependent care FSAs (DCFSAs) have annual contribution limits that you can’t exceed during the year. The IRS hasn’t yet announced 2022 limits, but your employer can tell you during open enrollment what limits they will be allowing.
If you have a dependent care FSA, pay special attention to the limit change. For 2021, the dependent care FSA limit dramatically increased from $5,000 to $10,500 because of the American Rescue Plan Act of 2021, and that change has not been extended to 2022. The limit is expected to go back to $5,000.
Many of the rule changes for FSAs in 2020, 2021, and 2022 are not mandatory for your employer to adopt. Your specific employer may choose to adopt all, some, or none of the rule changes. Employers do have the power to dictate many of the guidelines that affect your individual FSA, so pay close attention during open enrollment season, and make sure to ask your employer about any policies you’re not sure about. It’s important that you understand all of your options, including what you can and cannot do with any unused funds in your FSA. The more you know about your employer’s FSA policies, the more accurately you will be able to plan for 2022.
Image: St Phillips (Getty)