Larger FSA carryover amount

FSAs generally operate under a “use-it-or-lose-it” rule: Use money contributed during the year to pay for qualifying expenses incurred that year or forfeit the unused funds. However, for health care FSAs, an employer can bend that rule a bit and allow workers to carryover up to $500 of unused contributions to the next year.

Employers now have the option of upping the carryover amount for 2020 FSAs to $550. This doesn’t apply to amounts carried over from 2019 to 2020, though.

In addition, the carryover amount will be adjusted for inflation going forward.

Longer FSA grace period

Another way an employer can tweak the “use-it-or-lose-it” rule is by providing a grace period of up to 2 1/2 months to incur health or dependent care expenses for the previous year. For example, if an employee had unused FSA funds at the end of 2019, the employer could allow the worker to use the money to pay for qualifying health or dependent care expenses incurred from Jan. 1 to March 15, 2020. For health FSAs, an employer can adopt a carryover or a grace period (or neither), but it can’t adopt both features.

For 2020, the IRS is letting employers extend the grace period to the end of the year. Again, it’s optional, though. So, for example, if an employer sponsored a 2019 FSA with a grace period ending on March 15, 2020, it could amend its FSA plan to let workers to apply unused 2019 FSA funds to pay for qualifying expenses incurred through Dec. 31, 2020. However, health FSA amounts can only be used for medical care expenses, and dependent care FSA amounts can only be used for dependent care expenses.

The extension of time for incurring claims is available to both FSAs that have a grace period and FSAs that offer a carryover.

Note, however, that a worker who had unused amounts from a 2019 health FSA and who is allowed an extension to the end of 2020 to incur expenses generally will not be allowed to contribute to a health savings account (HSA) during the extended period.

Coronavirus testing and treatment’s impact on HSAs

On March 11, the IRS announced that anyone with a high-deductible health plan (HDHP) covering coronavirus testing and treatment before plan deductibles have been met can still contribute to a health savings account (HSA) and deduct those contributions on their 2020 tax return. (For details, see Free Coronavirus Testing and Treatment Won’t Affect HSA Deduction.) The IRS has now clarified that this applies to coverage of testing and treatment expenses for all of 2020 (not just since March 11).

The IRS also expanded the list of coronavirus testing and treatment that an HDHP can cover without a deductible or with a deductible below the minimum annual deductible otherwise required. First, it added the panel of diagnostic testing for influenza A & B, norovirus and other coronaviruses, and respiratory syncytial virus (RSV), and any items or services required to be covered with zero cost sharing. It also included telehealth and other remote care services. Therefore, for example, an otherwise eligible person covered by an HDHP who was reimbursed for these tests and services before satisfying the HDHP’s required deductible will still be allowed to contribute to an HSA in 2020.