Take a few minutes to review your workplace benefits for next year. Your household finances for 2021 could depend on it.
After one of the most difficult and financially stressful years for many Americans, digging back into the details of workplace benefits like health savings accounts, or HSAs, and flexible spending accounts (FSAs) is probably the last thing you want to do.
Overcome that fatigue and get to it.
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“People have to think about these plans every year, but this year they have to use a different lens to evaluate their options,” said Shannon Bailey, a senior director in health and group benefits at Willis Towers Watson.
Covid-19 has dramatically changed the optics of these plans.
For some, the coronavirus has led to much higher medical expenses than expected this year.
For others, it has prevented them from accessing health care they expected to use, due to community lockdowns and overburdened health-care facilities.
Workplace health-care plans require a fresh look going forward, especially after Covid-19.
“If you’re an employee that uses these plans, don’t wait to consider the details of them,” said Cari Weston, director for tax practice and ethics at the American Institute of Certified Public Accountants.
“Go to your HR rep, figure out what you have and consider the options open to you.”
The tax benefits of HSAs
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HSAs, available to savers with a high-deductible plan — that is, one with a deductible of at least $1,400 for self-only health coverage — have three key tax benefits.
First, they allow participants to contribute money to the account either pre-tax or on a tax-deductible basis.
Second, the investable funds accumulate free of taxes. Finally, you can withdraw the money tax-free if it’s used for eligible health-care expenses.
You don’t need to spend the balance down each year, as unused funds in the account roll forward, regardless of how much you spend.
Employers can also boost your savings with a matching contribution.
While many people use HSAs to cover ever-increasing out-of-pocket health-care expenses, their greatest benefit is as a savings vehicle to help pay for higher health-care costs you will have later in life.
“You want to build up HSAs to use for health-care costs in retirement,” said Kristen Appleman, a senior vice president at payroll provider ADP.
She has contributed to an HSA for the last 15 years. “Everyone should contribute the maximum allowed every year.”
For 2020, that maximum is $3,550 for self-only insurance coverage and $7,100 for family plans. Accountholders over age 55 are eligible for an extra $1,000 contribution.
The ins and outs of medical FSAs
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Medical FSAs share some commonalities with HSAs.
Both allow for pre-tax contributions. Balances can also be used on tax-free basis if it’s for qualified medical expenses. In 2020 and 2021, you can contribute up to $2,750 to a medical FSA.
You generally can’t contribute to both an HSA and a medical FSA at the same time.
The major difference between the two accounts is that FSAs have a “use it or lose it” stipulation that requires participants either spend the money they save or forfeit the funds to their employer at year-end.
Firms may choose to let employees roll over some of the money — that is, up to $550 for funds from the 2020 plan year — or they may give them a grace period up until March 15 of the following year to use the funding.
Some families have created daycare pods with other families to care for children or they hire people to take care of kids in their homes. Those are eligible expenses.
senior director in health and group benefits at Willis Towers Watson
Costs eligible for reimbursement by the funds include doctor visits, prescription drugs, lab work, and dental and vision care. Click here for a list of eligible expenses.
“I have teenagers with braces and a daughter with glasses,” said Appleman. “I know I’m going to have these expenses and a limited-purpose FSA helps me cover the cost.”
With community shutdowns and business closures, many Americans haven’t been able to get dental work or other medical-related procedures performed this year. In some cases, it’s left people with large unused balances in their FSAs.
In response, the IRS extended grace periods for filing reimbursement claims on 2019 plans through the end of this year.
It also allowed people to make mid-year changes to the plan elections they made last year for 2020. Employers have discretion on whether to adopt the changes so check with your HR rep to see if you qualify.
Dependent care FSAs
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Dependent care FSAs, which help employees offset dependent and childcare costs, have been dramatically affected by the pandemic and resulting community shutdowns.
Generally, a worker can save up to $5,000 in one of these accounts on a pre-tax basis, but again, the funds must be used up by the end of the year or they’re forfeited.
Due to Covid-19, daycare centers in many parts of the country have been closed for much of the year. What’s more, many employees found themselves working from home and taking care of their children themselves, which means they could have hefty balances in these dependent care FSAs.
The IRS addressed this situation by allowing employers to give workers the option of changing the amount they’d normally defer in the middle of the year.
That option may not be available next year, so be thoughtful about the money you commit to these dependent care FSAs as you decide how to proceed in 2021.
Bailey of Willis Towers Watson encourages people to think a little more broadly about dependent care FSAs as far as what they can be used for.
“People usually associate them with expenses for a daycare center, but the eligible expenses for reimbursement are much broader,” said Bailey.
“Some families have created daycare pods with other families to care for children or they hire people to take care of kids in their homes,” she said. “Those are eligible expenses.”
Now is the time to start crunching the numbers for funding these tax-favored accounts in 2021. Make sure your contributions match up with your expected expenses next year.
“We see forfeitures by account holders all the time,” said Weston of the AICPA.
“Find out what your options are and if your employer hasn’t adopted the changes from the IRS, you might want to put pressure on them to do so,” she said.