2021 Changes to Your Flexible Spending Account (FSA)
By Todd I. Youngdahl, CFP®
Are you maximizing the funds in your flexible spending account (FSA) this year? If not, you should know that FSAs were granted provisions in 2020 and 2021 to help families with children and other types of dependents save more in their tax-advantaged accounts and avoid losing health-related or dependent care money that went unspent due to the pandemic.
Let's review the flexible spending account (FSA) provisions that were granted to help busy families to ensure you take advantage of what applies to you.
FSAs are a great resource to help pay for medical costs, childcare, and care for other dependents (such as elderly parents or disabled adults) while lowering your household’s taxable income.
During the pandemic, many families saw their FSA funds remain unspent due to closed childcare businesses or canceled medical appointments. Other families experienced substantial increases in the cost of childcare because of school closures.
Fortunately, the Consolidated Appropriations Act of December 2020 and the American Rescue Plan of March 2021 included temporary updates to FSA rules. These updates consisted of increased contribution amounts for dependent care FSAs as well as allowances for FSA rollovers.
Of course, the option to implement these temporary rule changes was ultimately left up to employers’ discretion. Before making any decisions about your FSA, you’ll need to check with your employer to find out if the new provisions apply to you.
Perhaps the most exciting update for working parents is the temporary increase in allowable contributions for dependent care FSAs. An increase in contribution limits may help many families better manage the higher cost of childcare they experienced due to school closures.
- For married couples filing jointly, households can now contribute up to $10,500 of pre-tax dollars to their dependent care FSA in 2021 (up from the $5,000 limit in 2020).
- Single filers may contribute up to $5,250 in pre-tax dollars (up from the $2,500 limit in 2020).
Additionally, the Consolidated Appropriations Act from December 2020 provides temporary allowances for rollovers from both health FSAs and dependent care FSAs. Typically, funds in an FSA must be used within the same calendar year (plus a two-and-a-half-month grace period) and cannot be rolled over into the next calendar year.
For example, in 2019, any leftover funds in a family’s FSA would have been forfeited and could not be used for any expenses in 2020 after March 15th. However, because the pandemic forced many childcare and other dependent care businesses to close—temporarily or permanently—some households were unable to use their FSA funds.
Now, households may carry over FSA funds from 2020 to be used for eligible reimbursements in 2021. Similarly, funds contributed in 2021 may also be used for expenses in 2022.
Please note that these rules are temporary and at the discretion of your employer, so we encourage you to double-check that this provision applies to you before leaving money in your account for the next calendar year.
We understand that in the past year, legislation regarding your FSA may have happened without your knowledge. These updates can be confusing and overwhelming, especially because new FSA legislation only applies to employees whose employers have elected to implement the updates.
We are a Fee-Only fiduciary firm. The CFP® team at Washington Wealth Advisors helps to make the most of the financial opportunities available to you – with you and your goals at the forefront of what we do. If you want to increase contributions to your FSA, better understand how the new updates impact your financial situation, or find additional strategies to lower your household tax burden, call our office at 703.584.2700, email email@example.com or book some time with us to see how we can help.
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