You not have time to make use of these tax-privileged funds
Peathegee Inc | Tetra Pictures | Getty Images
You only have a few weeks to use – or lose – the money you’ve saved for medical purposes.
With flexible healthcare spending accounts that your employer may offer, you can save pre-tax dollars in a dedicated account. You can contribute up to $ 2,750 in 2020 and 2021.
These funds are tax-free and tax-free as long as the money is earmarked for qualified medical expenses such as dental care, acupuncture and prescription glasses.
Of course, nothing good lasts forever.
While you can tap the money as early as January 1st, you usually have until the end of the year to use the money or you will lose your remaining balance.
More from Smart Tax Planning:
Voters have decided to legalize and tax the leisure pot in these four states
This is the maximum you can save on your 401 (k) plan in 2021
Here are the new tax brackets for 2021
The IRS offers employers the option to allow employees to carry over some of the money into the following year – up to $ 550 for 2020 – or allow them to spend any leftover funds up to 2½ months after the plan year ends.
Companies don’t have to give you a choice.
To make things a little more interesting in the face of Covid-19, there are also some special rules the IRS added this year for FSA holders who haven’t used up their accounts as quickly as they’d like.
More time to linger
When Americans settled into their homes this spring, FSA health care owners likely postponed trips to the doctor and dentist.
The funds they rolled into 2020 from 2019 onwards were not used and they could lose the money.
Some employers were already offering flexibility to FSA savers, including setting deferrals on accounts, due to the pandemic, said Ed Zollars, CPA and partner at Thomas, Zollars & Lynch in Phoenix and an instructor at Kaplan Financial Education.
In return, the IRS released guidelines in May that will allow employers to update their plans and give workers an extended period of time to use unused FSA funds for healthcare starting in 2019.
These people can have until the end of this year to lower these amounts.
This relief also applies to money tied up in FSAs for dependent care – accounts that can save you up to $ 5,000 per year to offset the cost of caring for children under the age of 13.
The IRS also allowed employers to give workers the option to change both types of FSA or hold elections in the middle of the year. This means that these employees could adjust their contribution amounts.
Now for the catch: this is optional for employers.
“If the plan allows, you can spend the money by the end of the year,” Zollars said.
“Even if the IRS provides relief, the employer cannot choose to take it on,” he said. “You do not have to.”
Pandemic uncertainty until 2021
FatCamera | E + | Getty Images
Here’s another hiccup: The IRS’s May guidelines apply to transferring and using funds for 2019 in 2020. However, there’s no word on whether the tax officer will give plans the option to put the FSA funds on for 2020 to carry forward the next year.
“When we get to the end of December, the IRS is likely to reiterate that in 2020 there will be people stuck with money and unable to cut the contributions early enough,” Zollars said.
The stakes for FSAs with dependent care are even higher, as another wave of Covid-19 towards the end of the year could charge parents with a large credit that is not used.
“It is clear that if things go bad and we are shut down you may have unspent childcare funds,” Zollars said.
“Maybe your child is going to childcare now, but in January the hospitals fill up, things close and you can’t spend the money,” he said.
A guide to open enrollment
Portra | DigitalVision | Getty Images
Typically, you can consider your previous year’s spending patterns when deciding how much money to save on health care or dependent care in your FSA during the benefit recording season.
Speak to your HR department this fall and consider how your employer has handled IRS guidelines as of May.
Has your company given workers the flexibility to adjust their FSA contributions mid-year? As of 2019, have employees been given more time to spend remaining amounts?
If not, it might be worth adjusting the amount that you move to these accounts in 2021.
“If your employer has not adopted these rules and you get stuck with the moratorium, assume that they will do the same next year if the problem arises,” Zollars said. “You have to take it into account when making your decision.”