If your company maintains flexible spending arrangements (FSAs) for the healthcare expenses of employees, an important deadline may be looming: March 15, 2019. For many healthcare FSAs, this is the last day you can withdraw funds from the balance in your account for 2018.
Background: An FSA is funded with pre-tax dollars, so there are significant tax savings for employees. Furthermore, the employer does not have to pay Social Security and Medicare (FICA) taxes or federal unemployment (FUTA) tax on amounts that employees contribute to their FSAs. Those benefits may offset some or all of the administration costs of operating the plan. Thus, FSAs can be a “win-win situation” for employers and employees.
Distributions from healthcare FSAs that are made for qualified expenses—for example, the cost of LASIK surgery or braces for your children— are not subject to tax. But any withdrawals made for non-qualified expenses are fully taxable.
Under recent tax law changes, the amount that can be contributed annually to a healthcare FSA is limited. For 2018, the limit was $2,650. It is increasing slightly to $2,700 for 2019.
At the start of the year, employees must decide how much of their wages to allocate to their FSAs. Usually, this decision requires some advance planning, especially when you factor in the “use-it-or-lose it” rule.
How it works: If an employee does not withdraw the funds remaining in the FSA before the end of the year, this amount is forfeited. However, if your firm provides a grace period, employees may take an extra 2½ months to use up their FSA funds. Therefore, the effective deadline for the 2018 plan year may be March 15, 2019.
Alternatively, an employer may allow an employee to carry over up to $500 of unused FSA funds to the next year. For instance, if an employee has $300 left over in a healthcare FSA from 2018, he or she can carry over the $300 to the FSA for qualified expenses in 2019. But employers cannot permit both the grace period and the carryover rule— it has to be one or the other.
In addition, if a plan has a “run-out period,” employees generally have up to 90 days beyond the end of the plan year to request reimbursements for expenses incurred during the previous plan year. After this time elapses, any remaining funds are forfeited. For a plan year ending December 31, 2018, the run-out period for filing claims ends on March 31, 2019.
Best approach: Check the balance in your healthcare FSA. If you have unused funds that will be forfeited after March 15, consider expenditures you might make at this time, such as contact lenses or first-aid kits. The money is yours, at least for now, so you may as well spend it. Also, if your plan includes a run-out period, submit claims before the end of March.