16 Surprising FSA and HSA Eligible Expenses Your Employees Should Know About

Employers offer flexible savings accounts and health savings accounts to their employees so they can build up funds with pre-tax dollars to pay for health care and related expenses.

For the most part, people use their funds in FSAs and HSAs to reimburse themselves for out-of-pocket costs like copays, health insurance deductibles and the cost of prescription medications.

Unfortunately, many people don’t take full advantage of their FSAs and HSAs — and they could be getting reimbursed for a number of items they already are purchasing.

But while funds in an HSA roll over each year, the funds in an FSA must usually be spent by the end of the year, unless the employer allows its staff to carry over a certain amount to the following year.

Employers can offer one of two options to give their employees more time to spend their funds:

Grace period — You can provide an extra 2.5 months each year to spend the money in their flex accounts, which in most cases means until March 15 of the following year. In essence, they get 14.5 months to spend the funds. Whatever they don’t spend goes back to you, the employer.

Carry over — This allows your employees to keep some of the unspent money in an FSA from one year to the next.

In 2023, the maximum an employee can carry over is $610. This means that if they have money left in their FSA at the end of the plan year in 2023, they can keep up to $610 of it. If they have more than that at the end of the year, the rest goes back to you.

As a result, while employees with HSAs are not pressured to spend funds in their accounts every year, those with FSAs are. According to the Employee Benefit Research Institute, 48% of workers forfeited an average of $408 of their FSA funds in 2020.

Both FSAs and HSAs have the same rules for what they will cover.

However, employees often are unaware of the myriad of goods and services they can spend their funds on. To help your staff, you can educate them about these goods and services, and often the companies that host these accounts will provide a list of them. Typically, an expense is eligible if it mitigates, treats or prevents a specific disease or ailment from affecting the body.

These expenses are eligible too

You may also want to let them know about these 16 surprising eligible expenses:

  • Over-the-counter medicines — Anything from cough syrup and pain relievers to allergy medications and eyedrops.
  • Menstrual hygiene products
  • A fitness program if the person is suffering from a health issue like diabetes, hypertension or obesity.
  • Thermometers
  • Heating pads
  • Travel expenses to receive care
  • Massages if they are for relieving pain
  • Sunscreen with an SPF of 30 or higher
  • Insect repellent
  • Tobacco cessation programs
  • Genetic health tests (like 23andme).
  • Vitamins and supplements
  • Sleep deprivation treatment and medication
  • Breast pumps
  • Birth control devices (condoms, pills, etc.)
  • Baby monitors.

IRS Lets Employers Give Workers a Break on FSA Contributions, Health Plan Rules

New guidance from the Internal Revenue Service allows employers to temporarily give their employees extra benefits leeway in making changes to their flexible spending accounts (FSAs) and health savings accounts (HSAs).

The guidance, in response to the COVID-19 pandemic, also allows employees to make changes to their health plans outside of the traditional open enrollment period.

The COVID relief bill signed into law at the end of 2020 changed the tax law. The law ordinarily requires employees to make irrevocable plan choices before the first day of the plan year; later changes are normally permitted only under certain circumstances, such as a change in employee status.

However, 2020 was an abnormal year. For example, stay-at-home orders left employees with unused money in their dependent care FSAs because they unexpectedly did not have to pay for child daycare.

The temporary changes

Recognizing the current extraordinary situation, the new guidance makes several temporary changes:

  • Employers can permit employees to carry over unused funds from their 2020 FSAs to 2021, and from 2021 to 2022. Ordinarily, these accounts have a “use it or lose it” rule under which the employee forfeits unused funds at the end of the year.
    If an employee contributed $5,000 to a dependent care FSA in 2020 but used only $3,000 because he or she worked from home, they can now carry the remaining $2,000 forward for use in 2021.
  • Alternatively, employers can extend the grace period for employees to spend unused FSA funds. Normally, employees have two and a half months from the end of the plan year to spend the money on qualifying expenses. The temporary rules permit employers to give them up to 12 months to do it.
  • Employers can allow certain employees to use dependent care FSA funds for care of children up to age 14. The normal cut-off age is 13.
  • Employers may allow employees to change their future contributions to 2021 FSAs mid-year, something that is ordinarily prohibited.
  • Employers may also permit employees to make mid-year health plan changes. Employees who did not enroll in the employer’s health plan during open enrollment will be able to do so.
    Employees can change available plans, or they can drop coverage entirely if they can show that they have replacement coverage such as through a spouse’s employer.
  • If an employee changes from a high-deductible health plan to one with copayments or lower deductibles (or vice versa), employers can also permit them to switch mid-year between contributing to an HSA or an FSA. By law, an HSA must be coupled with an HDHP.
  • Lastly, they can allow employees who stop contributing to a health care FSA mid-year to receive reimbursements through the end of the plan year.

It is important to know that:

  • The law does not require employers to make these changes.
  • The changes expire for plan years starting in 2022 and later.

The pandemic has been difficult for employers and employees alike. These temporary changes will make it a little easier for both to cope.

IRS Allows Mid-Year Changes to Health Plans, FSAs

The IRS has loosened restrictions on employees who want to make changes to their group health plans and flexible spending accounts (FSAs) in the middle of the policy year.

IRS rules are typically stringent and rigid, barring changes from being made to health plans except during open enrollment. Under the new rules, the employer would still have to approve letting staff make changes to their plans if they have more than one option to choose from.

The IRS issued the new guidance after employer groups lobbied the agency and Congress to loosen the rules because the COVID-19 pandemic has led to profound changes in employees’ health care needs as well as access to childcare.

The new rules are temporary and apply only to 2020. All of the following mid-year changes must be approved by the employer;

Health plan changes: Employers can let employees make mid-year changes that would be in effect for the remainder of the year. The new guidance allows employees to:

  • Drop out of their health insurance if they have another option,
  • Sign up for insurance if they have not done so,
  • Add family members to their plan, or
  • Switch to a different health insurance plan.

Allowing these changes could be beneficial to employees who have had their salaries cut, or were furloughed, but were able to retain their health coverage. Someone in this position, for example, may decide to switch to a lower-cost health plan if they are unable to afford the premiums on their current plan. 

Flexible spending accounts: Employees must decide before the plan year starts how much to set aside every paycheck into their FSA, the funds of which can be used to pay for health care-related expenses. Under the new guidance, they are allowed to make changes to their contribution levels mid-year.

Employees that expect more medical expenses and are able to afford it, can elect to increase their FSA funding. But those who may have been setting aside funds for an elective surgery that they may want to postpone, can chose to decrease the amount they put into their FSA every month.

Carryover amount: Regulations governing FSAs require employees to use all of the funds in their FSA in a given year or lose it. There are two exceptions: Employers can give employees a two-and-a-half-month grace period after the end of the plan year to spend remaining funds that are in the account at the end of the year, or they can let workers carry over up to $500 from one year to the next.

Starting this year, the carryover limit will be set at 20% of the maximum health care FSA contribution limit, which is indexed to inflation. That means that for 2020, employers can let employees carry over up to $550 into 2021.

The takeaway

While allowing your employees to make changes can help them better budget their health care spending, making the change will result in extra administrative expenses for you. Changing plans mid-year, signing up employees for new plans and adding dependents can involve a significant amount of paperwork and documentation.

That said, allowing employees to make these changes mid-year could help them better budget their health care spending and give them some extra peace of mind.