Edward A. Zurndorfer–
An important decision that employees have to make during the 2019 Federal benefits “open season” is whether they want to enroll – or to re-enroll – in a health care flexible spending account (HCFSA) for the 2020 plan year. This newsletter discusses HCFSAs and how these accounts can benefit employees.
An HCFSA allows an employee 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 healthcare-related and/or dependent care-related expenses. The HCFSA can be thought 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 medical, dental or vision insurance plan.
The money contributed to an employee’s HCFSA is set aside 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 an HCFSA or DCFSA is approximately $600. That means the employee gets $2,000 worth of health care purchasing power plus saving about $600 in overall taxes.
An employee must be eligible to enroll in, though not necessarily enrolled, in the FEHB Program in order to enroll in an HCFSA. The HCFSA reimburses qualified health care expenses not covered or reimbursed by an 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 (including adult children through the end of the calendar year in which they become age 26) may be reimbursed through the HCFSA.
During 2019, employees can contribute to their HCFSA from a minimum of $100 to a maximum of $2,700 (this limit may be increased for 2020 as the IRS has not announced the 2020 HCFSA limit as of this writing). Spouses of employees who are also Federal employees can also contribute annually a maximum of $2,700 to an HCFSA during 2020.
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 at www.irs.gov. Also, non-prescription medicines other than insulin are not considered qualified medical expenses for HCFSA reimbursement purposes. A medicine or drug will be a qualified medical expense for HCFSA reimbursement purposes only if the medicine or drug: (1) Requires a prescription; (2) is available without a prescription (an over-the-counter medicine or drug) and the individual can get a prescription for it; or (3) is insulin. No type of insurance premium – health, dental, vision or long term care – may be reimbursed from an HCFSA. In short, the expenses eligible for HCFSA reimbursement can be summarized as follows:
Health Care FSA Eligible Expenses
- Medical expenses: co-pays, co-insurance, and deductibles
- Dental expenses: exams, cleanings, X-rays, and braces
- Vision expenses: exams, contact lenses and supplies, eyeglasses, and laser eye surgery
- Professional services: physical therapy, chiropractor, and acupuncture
- Prescription drugs, insulin, and prescribed over-the-counter medicine
- Over-the-counter health care items: bandages, pregnancy test kits, blood pressure monitors, etc.
More specifically, the FSAFEDS program on its Web site provides a list of eligible expenses and services to be reimbursed under an HCFSA. These eligible expenses and services may be viewed here. Employees can see how much they can save with an HCFSA using the online calculator.
Those employees who are enrolled in a High Deductible Health Plan (HDHP) with an HSA are not eligible to enroll in the HCFSA. But these employees may be eligible for a “limited expense” flexible spending account or a “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.
To be eligible for a LEX HCFSA, an employee can be enrolled in an HDHP during 2020 and contribute to an HSA during 2020. The employee can request reimbursement from the LEX HCFSA for only qualifying dental and vision expenses incurred by the employee, by the employee’s spouse and tax dependents (including adult children through the end of the calendar year they become age 26). There is an annual maximum contribution to a LEX HCFSA of $2,700 per employee. An employee’s spouse who is also a Federal employee can have a separate LEX HCFSA with a maximum contribution amount of $2,700.
Eligible employees can enroll in FSAFEDS each year during the Federal benefits “open season”. This year’s Federal benefits “open season” enrollment is being held from Nov. 11, 2019 through Dec. 9, 2019. Enrollment is made on the FSAFEDS Website. Elections made during this “open season” will be effective Jan. 1, 2020. Eligible expenses for reimbursement must be incurred between Jan. 1, 2020 and Dec. 31, 2020. Effective with the 2015 plan year, HCFSA owners are able to carry over up to $500 of unspent funds into the next plan year. Note that if an HCFSA owner wants to carry-over up to $500 of unused HCFSA funds to 2020 but does not want any additional HCFSA funds to be withheld from his or her salary during 2020, he or she must still reenroll in FSAFEDS for 2020 during the 2019 HCFSA “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 or 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 to www.FSAFEDS.com
or call 1-877-372-3337; TTY 1-800-952-0450.
Edward A. Zurndorfer is a Certified Financial Planner, 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, 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 the employees of Serving Those Who Serve 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.
Health Care Flexible Spending Accounts