Understanding Health Care Flexible Spending Accounts (HCFSA)

From the “Fed Zone”- Understanding Health Care Flexible Spending Accounts (HCFSA) by Ed Zurndorfer

An important decision that employees have to make during the 2018 Federal benefits “open season” is whether they want to enroll – or to re-enroll – in a health care flexible spending account (HCFSA) for the 2019 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 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. Spouses of employees who are also Federal employees can also contribute annually a maximum of $2,700 to an HCFSA during 2019. The $2,700 limit represents a $50 increase from the $2,650 maximum in effect during 2018. 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.  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 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.

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.

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 2019 and contribute to an HSA during 2019. 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 (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. 12, 2018, through Dec. 10, 2018.  Enrollment is made on the FSAFEDS Web site.  Elections made during this “open season” will be effective Jan. 1, 2019. Eligible expenses for reimbursement must be incurred between Jan. 1, 2019 and Dec. 31, 2019. 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 2019 but does not want any additional HCFSA funds to be withheld from his or her salary during 2019, he or she must still reenroll in FSAFEDS for 2019 during the current 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 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 LEXFSA, employees should go to www.FSAFEDS.com or call 1-877-372-3337; TTY 1-800-952-0450.

Written by Edward Zurndorfer, who is a Certified Financial Planner™, Chartered Financial Consultant, Chartered Life Underwriter, Certified Employee Benefits Specialist and Enrolled Agent in Silver Spring, MD. He is the owner of EZ Accounting and Financial Services, an accounting, tax preparation, and financial planning firm also located in Silver Spring, MD. He is a seminar speaker at Federal employee retirement seminars throughout the country for the National Institute of Transition Planning, Inc. He is also a weekly columnist for MyFederalRetirement.com. Raymond James is not affiliated with and does not endorse the opinions or services of FEDZONE or Edward A. Zurndorfer or any of the above-listed organizations. The information has been obtained from sources considered reliable, but we do not guarantee that the foregoing material is accurate or complete. Any opinions are those of Edward A. Zurndorfer, and not necessarily those of RJFS or Raymond James. Links are being provided for information purposes only. Raymond James is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. Raymond James is not responsible for the content of any website or the collection or use of information regarding any website’s users and/or members. Raymond James does not offer tax or legal services. You should discuss tax or legal matters with the appropriate professional. Securities offered through Raymond James Financial Services, Inc., Member FINRA/SIPC. Investment advisory services offered through Raymond James Financial Services Advisors, Inc. Serving Those Who Serve is not a registered broker/dealer and is independent of Raymond James Financial Services