The IRS isn’t the most nimble of organizations, and it would be a stretch to say that health benefits organizations savor oversight. However, what we have seen recently from the IRS (and Congress) is a dedicated and purposeful movement to expand health savings options. In direct response to ‘unprecedented times,’ they have methodically increased health plan flexibility and contribution amounts for related tax-free savings options.
The steady rollout of IRS notices and relief packages that include health care coverage or contribution expansion has increased flexibility for all eligible Americans. It’s a speed of change that providers and account holders have never before witnessed. The resulting impact is an immediate increase in flexibility. The longer-term impacts will likely shift health plan design and selection, if the legislative changes resulting from relief packages become permanent changes. Employer education is also required to keep up with the speed of change so employees can understand the impact of those changes.
Legislative review
Recent legislative changes are making Health Savings Accounts (HSAs) and Flexible Spending Accounts (FSAs) even more attractive for Americans.
The CARES Act – On March 27th, 2020, Congress passed and the President signed the Coronavirus Aid, Relief, and Economic Security Act (the CARES Act). The CARES Act has expanded HSA-eligible items to include over-the-counter (OTC) medical products without a prescription, or letter of medical necessity from a physician. This includes previously ineligible items like allergy medication, cough medication, and pain relievers, along with menstrual care and other feminine hygiene products. The change applies to all qualified purchases made after January 1, 2020.
At the same time, “telemedicine,” or “telehealth” is now temporarily HSA-eligible. This is effective for any appointments or services covered under HSA-eligible health plans that begin between March 27, 2020, and December 31, 2021.
During this time, an HSA-qualified plan that covers any portion of telehealth and/or remote care services before the deductible will not lose their HSA eligibility because of the telehealth coverage. To the extent that telehealth and/or remote care services cost anything, they can be paid for using HSA dollars for approximately the next two years. It remains to be seen if this new category becomes permanent.
Consolidated Appropriations Act of 2021 – This is directed entirely at FSA plan eligibility and coverage and applied at the discretion of each plan sponsor.
- * Employers can offer FULL CARRYOVER of unused funds, with no penalty, of all 2020 FSAs (Health, Limited Purpose, and Dependent Care) in 2021
- * FSAs may permit a 12-month grace period, with no penalty.
- * A Medical FSA participant terminating participation during a plan year may spend down unused funds for the remainder of the plan year, if the plan permits, for any plan year ending in 2020 or 2021.
- * If a Dependent Care FSA’s plan year enrollment was prior to January 31, 2020 and a participant’s qualifying dependent turned 13 during such plan year, the participant is eligible to enroll in and use Dependent Care FSA for the subsequent plan year to cover such dependent.
- * A Plan may permit participants to change elections in the Plan Year ending in 2021 without experiencing a qualifying life event.
These are not requirements for plan providers or employers, but rather new options.
American Rescue Plan Act of 2021 – Dependent Care FSA contribution limits DOUBLE! This temporarily increases the tax-free Dependent Care FSA reimbursable limit to $10,500 ($5,250 for married couples filing separate tax returns) in the taxable years beginning after December 31, 2020, and before January 1, 2022. This relief is an option and employers are not obligated to adopt the increase in contribution.
The Emergency Relief Act – Due to the recent winter storm, which greatly impacted the state of Texas and Oklahoma, the IRS issued TX-2021-02, OK-2021-01, and LA-2021-01 allowing Texas, Oklahoma, and Lousinna citizens to contribute to their HSAs until June 15, 2021. All individuals who reside in Texas, Oklahoma or Lousianna are eligible for this relief.
On top of that, for the second year in a row, in response to the ongoing coronavirus pandemic, the federal income tax filing deadline and HSA contribution deadline have been postponed to May 17, 2021.
The result is more time to contribute for existing account holders. Note that each state has its own filing deadline. Account holders who want to make a new or extra 2020 HSA contribution should file according to their 2020 state tax filing deadline.
What you are seeing is an unprecedented movement to increase flexibility of tax-advantaged HSA and FSA accounts, increased contributions amounts (for DCFSA accounts), and more time for all existing account holders to contribute to their HSA. If made permanent, the culmination of these changes will shape health care enrollment for years to come.
2021 HSA contribution amounts
For 2021, HSA-eligible account holders are allowed to contribute $3,600 for individual coverage and $7,200 for family coverage. Both coverage levels are a $50 increase for individuals and $100 for families from 2020 HSA contribution limits.
If you are 55 years or older, you’re still eligible to contribute an extra $1,000 catch-up contribution.
The legislation outlined above had no expected impact on 2021 HSA contribution limits or the 2021 federal tax deadline. This only applies to 2020 HSA contributions (filing timing, not limits) as they relate to the federal tax deadline.
2021 FSA contribution amounts
Health FSA Contribution Limit – Whether they’re an individual or a member of a family, an employee’s contributions combined with their employer’s cannot exceed $2,750 in 2021.
Dependent Care FSA Contribution Limit – In 2021, employees may contribute up to $5,000 if they file taxes as an individual, or are married and filing taxes jointly. They may contribute up to $2,500 if they’re married but filing taxes separately (each spouse can contribute $2,500 to separate FSAs). As noted above, based on the American Rescue Plan Act of 2021, DCFSA contribution limits have increased to $10,500 ($5,250 for married couples filing separate tax returns) in the taxable years beginning after December 31, 2020, and before January 1, 2022.
Limited Purpose FSA Contribution Limits – In 2021, the total contribution amount for a Limited Purpose FSA cannot total more than $2,750. This includes contributions made both from an employer and an employee.
Will history repeat itself?
HDHPs surged after the 2009 recession. After the 2009 recession, HSA assets increased from $7.2 billion in 2009 to $12.2 billion in 2011, according to Devenir.
The pandemic, resulting legislative changes, and increased awareness of the benefits of HSAs will lead to an even greater surge of employers turning to HSA-eligible HDHPs as a way to increase savings and offer more diversified health care options that cater to individuals looking to balance short-term and long-term upsides.
The last year has illuminated the employee’s desire and need for robust health and financial wellness benefits, and it’s more clear than ever that the HSA is one of the only benefits that checks both of those boxes.
Even though it’s hard to imagine the IRS and Congress working in partnership to expand health care coverage and tax-free contributions, the resulting impacts are cohesive in effect. The requirement for providers, consultants, brokers and employers alike is to ensure employers are readily aware of the new regulations and how they impact health plan usage and selection.
COVID-19 pushed the American health care system to its breaking point. It could also be the beginning of a movement to increase healthcare affordability and coverage. Iterative change feels like a drop in the bucket, but the combination of these new changes will accelerate current trends and with some continued support, expansion of tax-advantaged health savings to all Americans.