As 2017 winds to a close, the clock is ticking for people to use up any remaining balance they might have in their health flexible spending accounts.
FSAs, also known as flexible spending arrangements, are a type of consumer-driven health plan that allows employees to set aside money on a pre-tax basis to pay for qualified medical expenses.
Before the start of each plan year, employees designate an amount of salary-reduction dollars or flexible credits to allocate to their health FSAs, but they forfeit any leftover amounts remaining in their accounts at the end of the year.
Employers have some options for easing the annual use-it-or lose-it rules. In Notice 2013-71, the IRS said sponsors of FSA plans could provide employees with a 2 1/2-month grace period at the end of a plan year or allow employees to carry over up to $500 of unused FSA funds into the following plan year.
If employers haven’t adopted one of those options, unused funds are lost at the end of the calendar year. It’s a good idea to give employees a reminder that spells out exactly how the plan works so they’ll know what they need to do with regard to any remaining funds in their FSA accounts.
Take It to the Limit?
In addition to avoiding the forfeiture of FSA funds, it’s important to plan for next year’s anticipated medical expenses and what’s ahead for account-based health plans in 2018.
For those people who haven't already made their 2018 FSA elections, now is the time to do so. Keep in mind that the maximum FSA contribution amount increases to $2,650 next year, up from $2,600 in 2017, according to annual adjustments announced by the IRS in Rev. Proc. 2017-58.
The IRS has also announced adjustments for health savings accounts, which will have contribution limits of $3,450 for self-only coverage and $6,900 for family coverage in 2018, up from $3,400 and $6,750 this year, according to Rev. Proc. 2017-37. HSAs are only available to employees covered by high-deductible health plans, and they can be funded by both employers and employees.
When it comes to decisions about contributions, HSAs operate more like individual retirement accounts than like health FSAs. HSAs don’t require an election prior to the start of the year, deposits aren’t handled as pretax salary reductions, and the funds in HSAs aren’t subject to any use-it-or lose-it requirements. Employees can take income tax deductions for HSA contributions regardless of whether they make a number of smaller deposits during the year or a lump sum deposit equal to the annual limit.
Health Reimbursement Arrangements
In looking ahead to upcoming changes, health plan sponsors should also be aware of recent moves related to health reimbursement arrangements. HRAs are exclusively funded by employer contributions and can't involve employee salary reduction agreements like health FSAs. And unlike HSAs, they don’t have to be coupled with HDHPs.
One of the limitations imposed during the Obama administration kept HRA funds from being used by employees to pay for health insurance purchased through the individual market. However, an executive order issued in October by President Trump directed federal agencies to loosen HRA restrictions.
More recently, guidance from the IRS addressed the availability of “qualified small employer health reimbursement arrangements,” or QSEHRAs. Under the 21st Century Cures Act, which was enacted in late 2016, employers with fewer than 50 employees that don't sponsor group health plans are allowed to offer their workers QSEHRAs to purchase health coverage.
IRS Notice 2017-67 spells out the requirements of offering QSEHRAs, including the written notice that employers must give to eligible employees about availability of the arrangements.
In 2018, maximum employer contributions to QSEHRAs will be $5,050 for self-only coverage and $10,250 for family coverage, up from $4,950 and $10,000 this year, the IRS announced in Rev. Proc. 2017-58. (Other types of HRAs aren't subject to statutory annual contribution limits, but employers often set maximum contribution amounts in HRA plan documents.)
With 2018 just around the corner, employers should tie up any 2017 loose ends right away and check to ensure they and their employees are prepared to comply with 2018 limits.
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