Health Care Flexible Spending Accounts Help Pay Out-of-Pocket Medical, Dental and Vision Expenses in a Tax-Preferential Way
Edward A. Zurndorfer–
An important decision that employees have to make during the 2020 federal benefits “open season” is whether they want to enroll – or to reenroll – in a health care flexible spending account (HCFSA) for the 2021 plan year. This column discusses how participation in an HCFSA can help reduce an employee’s out-of-pocket medical, dental and vision expenses.
Those employees who choose not to enroll in a HCFSA may be eligible to enroll in a health savings account (HSA). The HSA was discussed in a previous FEDZONE column.
A HCFSA allows the employee owner of the HCFSA to be reimbursed for out-of-pocket medical, dental or vision expenses. Employees who work for an Executive Branch agency or an agency that has adopted the Federal Flexible Benefits Plan (“FedFlex”) can elect to participate in the Federal flexible spending account program, called the FSAFEDS program.
Employees who participate in the FSAFEDS program save money through the reduction of a portion of their gross salary to pay their out-of-pocket health care-related expenses. The HCFSA can be thought of as a savings account that pays – in a tax-beneficial way – for out of pocket expenses typically not paid for, or covered by, a Federal Employees Health Benefits (FEHB) program plan, by a Federal Employees Dental and Vision Insurance Program (FEDVIP) plan, or by another privately owned health, dental or vision insurance plan.
The money contributed to an employee’s HCFSA is set aside from an employee’s salary before Federal and state income taxes, and Social Security (FICA) and Medicare Part A (hospital insurance) payroll taxes are deducted, resulting in overall tax savings ranging from 20 to 50 percent. The average tax savings for an employee earning $50,000 who contributes $2,000 to a HCFSA is approximately $600. That means the employee gets $2,000 worth of health care purchasing power plus saving about $600 in overall taxes.
The HCFSA is now discussed in more detail.
An employee must be eligible to enroll in, though not necessarily enrolled in, the FEHB program in order to enroll in a HCFSA. The HCFSA reimburses qualified health care expenses not covered or reimbursed by a FEHB program plan, a FEDVIP plan, or any other insurance program that an employee may be enrolled in including TriCare or a spouse’s private company-sponsored health insurance plan. The eligible expenses of the employee, the employee’s spouse, and the eligible tax dependents may be reimbursed through the employee’s HCFSA.
During 2021, employees can contribute to their HCFSA from a minimum of a $100 to a maximum of $2,750. Spouses of employees who are also federal employees can also contribute annually a maximum of $2,750 to a HCFSA during 2021.
Qualified medical expenses are those specified in the plan that would generally qualify for the medical and dental expense deduction on an individual’s tax return. These expenses are explained and presented in IRS Publication 502 (Medical and Dental Expenses), which can be downloaded here. Many of an employee’s out-of-pocket health care expenses may be reimbursed by a HCFSA if those expenses are not covered by your FEHB or FEDVIP plans. Typical expenses include:
- Chiropractic services
- Co-insurance, co-pay amounts and deductibles
- Contact lenses and cleaning solutions
- Dental care and procedures not covered under a FEDVIP plan (including crowns, endodontic services, implants, oral surgery, periodontal services, and sealants)
- Eye surgery not covered under a FEDVIP plan (cataract, LASIK, corneal rings, radial keratotomy, etc.)
- Eyeglasses not covered under a FEDVIP plan (including prescription sunglasses and over-the-counter reading glasses)
- Hearing aids and batteries
- Infertility treatments
- Orthodontia not covered under a FEDVIP plan
- Over the counter (OTC) items (including sunscreen, bandages, and hearing aid batteries)
- Over the-counter (OTC) medicines and drugs (including antacids, allergy medicines, cold medicines, and pain relievers).
In accordance with the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) that was signed on March 27, 2020, over the counter (OTC) medicines or drugs (e.g., acne treatments, allergy and cold medicines, antacids, etc.) are eligible for reimbursement from an employee’s Health Care FSA without a physician’s prescription as of January 1, 2020. Any over OTC medicines or drugs purchased prior to January 1, 2020 are only eligible for reimbursement with a physician’s prescription. Any items used for general health or cosmetic purpose are NOT eligible.
The FSAFEDS program on its Web site provides a list of eligible expenses and services to be reimbursed under a HCFSA. These eligible expenses and services may be viewed here.
Those employees who are enrolled in a High Deductible Health Plan (HDHP) with an HSA are not eligible to enroll in a HCFSA. But these employees may be eligible to enroll in a “limited expense” flexible spending account or LEX HCFSA. A LEX HCFSA reimburses employees for eligible dental and vision expenses not covered or reimbursed by the FEHB and FEDVIP programs or other insurance programs.
An employee can enroll in a LEX HCFSA and also be enrolled in a HDHP during 2021 and contribute to an HSA during 2021. The employee can request reimbursement from the HSA for qualifying dental and vision expenses incurred by the employee, by the employee’s spouse and tax dependents. The maximum contribution to a LEX HCFSA during 2020 is $2,750 per employee. An employee’s spouse who is also a federal employee can have a separate LEX HCFSA with a maximum contribution amount of $2,750.
Eligible employees can enroll in FSAFEDS each year during the Federal benefits “open season”. This year’s federal benefits “open season” enrollments are being held from Nov. 9, 2020 through Dec. 14, 2020. Enrollment is made on the FSAFEDS Website here. Elections made during open season will be effective Jan. 1, 2021. Eligible expenses for reimbursement must be incurred between Jan. 1, 2021 and Dec. 31, 2021. Effective with the 2015 plan year, HCFSA owners are able to carry over up to $550 (an increase of $50 from the carryover amount of $500 from 2020 to 2021) of unspent funds into the next plan year. Note that if a HCFSA owner wants to carryover up to $550 of unused HCFSA funds to 2022 but does not want any additional HCFSA funds to be withheld from his or her salary during 2021, he or she must still reenroll in FSAFEDS for 2021 during the 2020 “open season”.
Current enrollees in FSAFEDS are reminded to enroll each year to continue participation in FSAFEDS for the next plan year. Enrollment in the HCFSA and LEX HCFSA does NOT carry forward from year to year. New and newly eligible employees who wish to enroll in this program must do so within 60 days after they become eligible, but before October 1 of the calendar year.
For further information about the HCFSA and the LEX HCFSA, employees should go here or call 1-877-372-3337; TTY 1-866-353-8058.
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Edward A. Zurndorfer is a CERTIFIED FINANCIAL PLANNER™ professional, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.
