Debunking Health Care Flexible Spending Account (HCFSA) Myths and Why Every Federal Employee Should Own an HCFSA
Edward A. Zurndorfer
More than 30 million Americans including federal employees are enrolled in health care flexible spending accounts (HCFSAs). Permanent full-time or part-time federal employees are eligible to enroll in a health care flexible spending account offered through the “FedFlex” program. Information about the program can be obtained at www.fsafeds.com.
Unfortunately, there is only a small percentage of federal employees participating in the FSAFEDS HCFSA. Employees should be aware that it makes no difference which health plan an employee is enrolled in with respect to participation in ah FSAFEDS HCFSA. The federal employee can be enrolled in a Federal Employees Health Benefits (FEHB) program health plan, or the employee can be enrolled in TriCare (group health insurance plan available to retired members of the Uniformed Services). Or an employee can be enrolled in a spouse’s individual insurance plan. The purpose of the HCFSA is to pay any out-of-pocket medical, dental and vision expenses using before-taxed dollars. The before-taxed dollars are set aside from an employee’s gross salary, before all taxes including federal and state income taxes and Social Security and Medicare Part A payroll taxes, to his or her HCFSA. Employees should also be aware that there is no health insurance, dental insurance or vision insurance plan that pays all expenses. There will be deductibles, coinsurance, copayments and expenses that the insurances will not cover or pay. With respect to out-of-pocket health care expenses, it is not a matter of how much, but rather what it is the best way – before-tax or after-tax – to pay these expenses. That is why it is important for employees to consider enrolling in an HCFSA offered through FSAFEDS, using before-taxed dollars and thereby reducing their federal and state income liabilities each year.
FSAFEDS conducts an “open season” enrollment every year from the second Monday of November through the second Monday of December. Between now and December 12, 2022, federal employees can enroll in the HCFSA for 2023, or reenroll if they are enrolled during 2022. Employees should be aware that HCFSA enrollment in HCFSA does not automatically rollover from one year to the next.
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HCFSA “open season” is the perfect time to educate federal employees about HCFSAs and to debunk some common HCFSA myths that may cause some federal employee to miss among other things the tax advantages of enrolling in an HCFSA. By educating federal employees about FSA rules and disposing four HCFSA myths, it is hoped that more employees will enroll and get the most of their tax-free healthcare dollars:
- Myth #1. Under rules enacted during the height of the COVID-19 pandemic in 2020, there is no longer a “use-it-or-lose-it” December 31,2022 employee spending deadline for HCFSA funds set aside during calendar year 2021. The fact is that HCFSA deadline extensions were temporary and not all employers adopted these temporary rules. FSAFEDS did not adopt the extension to spend HCFSA funds set aside during 2021 by December 31, 2022.
- Myth #2. Federal employees who set aside part of their gross salary during 2022 into their FSAFEDS HCFSA have a spending deadline of December 31,2022 with no rollover provision. This is not true. The fact is that legislation passed during 2015 allows a rollover of unused HCFSA funds from one plan year to the next plan year of $500, indexed to inflation. FSAFEDS has adopted this rollover of unused HCFSA fund provision. For 2022, those federal employees who realize that they will have unused HCFSA funds as of Dec. 31,2022 may rollover a maximum $570 of unused funds to 2023. To do so, the employee must enroll in the HCFSA for 2023 (they do so by going to www.fsafeds.com). This is the case even if an employee chooses not to add to his or her HCFSA via payroll deduction during 2023.
- Myth #3. An HCFSA can be used only for a limited number of health care expenses such as dental and vision care. The FedFlex program also offers a “limited purpose” HCFSA that pays or reimburses for only out-of-pocket dental and vision expenses. It is called a “limited expense” HCFSA or LEXHCFSA. The purpose of the LEXHCFSA is to allow those federal employees who contribute to a health savings account (HSA) (and who are not allowed to contribute to the regular HCFSA) to be allowed to contribute to a LEXHCFSA in order to pay for qualified out-of-pocket dental and vision expenses. Also, the FSAFEDS HCFSA pays or reimburses for a variety of medical expenses including massage therapy, prescriptions, diabetes testing supplies, wheelchairs and walkers, hand sanitizer, birth control pills, invitro fertilization, sunblock and transportation costs (if purely for a medical purpose).
- Myth #4. It does not make sense for an employee to enroll in an HCFSA if the employee will not use the set aside funds and lose the money. The fact is that by contributing to an HCFSA, a federal employee is reducing his or her federal and state taxable income. By most estimates, employees can save an estimated 30 percent in taxes by contributing to an HCFSA, based on individual federal and state marginal tax brackets. This is most important with persistent inflation driving up healthcare costs and services. In addition, there are easy-to-use tools and apps on www.fsafeds.com web site helping HCFSA account holders project tax savings, map out healthcare spending needs and quickly and easily shop for the latest FSA-eligible products. In short, federal employees who enroll in a FSAFEDS HCFSA will help themselves become efficient and savvy healthcare consumers.
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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.