Understanding Health Care Flexible Spending Accounts and What They Can Do to Reduce Health Care Expenses
- By Edward A. Zurndorfer
- Nov 20, 2018
An important decision that employees have to make during the 2018 Federal benefits “open season” is whether they want to enroll - or to reenroll - in a health care flexible spending account (HCFSA) for the 2019 plan year. This newsletter discusses HCFSAs and how these accounts can benefit employees.
A 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 health care-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 a 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 a $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 a 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 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 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 a HCFSA. These eligible expenses and services may be viewed at https://www.fsafeds.com/explore/hcfsa/expenses.
Those employees who are enrolled in a High Deductible Health Plan (HDHP) with a 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 at www.FSAFEDS.com. 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 a HCFSA owner wants to carryover 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 2018 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.
Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Certified Employee Benefits Consultant, Registered Health Underwriter 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.