New Rules and Ways to Use HSAs/FSAs
People who own a high-deductible health insurance plan may have the ability to open a health savings account (HSA). They can contribute pre-tax income to an HSA and invest the money for tax-free growth in a variety of mutual funds, stocks and exchange-traded funds (ETFs).
The funds may be withdrawn tax-free when used to pay for qualified expenses, such as the plan’s high deductible, copayments and coinsurance. The funds also can be used to purchase a wide range of health-related products.
However, a recent poll found that 40 percent of respondents who have access to a health savings account do not fully understand them. Perhaps that is why legislation passed last year that increased eligible uses of HSA funds largely went under the radar. The CARES Act included a provision that greatly expanded the number and types of health-related products and services that can be paid for with money from an HSA or an employer-sponsored Flexible Spending Account (FSA). The following list includes many of the newly eligible expenses (some require a Letter of Medical Necessity (LMN) from a licensed provider):
- Over-the-counter medications, such as for fever, cold and flu, headache, muscle aches, acid, heartburn and indigestion relief, allergy and sinus relief, anti-diarrheal and constipation medicine
- Toothache relief
- Skin and rash ointments, medicated body lotions
- Rubbing alcohol
- Band-Aids and bandages
- Kinesiology tape
- Hot and cold therapy packs, cooling headache pads
- Eye drops
- Facial cleansers, face wipes
- Prescription acne medication and over-the-counter acne treatments
- Sunscreen and SPF moisturizers (including expensive anti-aging facial lotions with SPF protection)
- Lip balm for sun protection and chapped lips
- Sleep and snoring aids
- Smoking cessation nicotine gum, patches, lozenges, inhalers and nasal sprays
- Prescription sunglasses
- Humidifiers, air purifiers and filters
- Dietician fees
- Some mental health treatments and services
- Prescription hormone replacement therapy
- Birth control pills
- Pregnancy tests
- Fertility tests
- Fertility treatments such as in vitro fertilization, intrauterine insemination, fertility medication, the temporary storage of eggs or sperm
- Birth classes and medically certified doulas
- Breast pumps, breastfeeding classes, absorbent breast pads, breast milk storage bags
- Baby monitors and potty training undies
- Feminine care items, such as pads, tampons, cups and sponges
- DNA/Ancestry kits
In 2021, the contribution limit for a health savings account is $3,600 for individuals and $7,200 for families; anyone age 55 or older can make an additional $1,000 annual contribution.
Just recently, the IRS published guidelines for employers regarding the use of Flexible Spending Account funds. Because of social distance guidelines and shutdowns in 2020, many people continued to work from home and contribute to their FSA but were unable to use those funds, which are generally designed to be used in the year saved (or otherwise lost).
The new guidelines allow employers to carry over or extend the grace period for unused health and/or dependent care FSA funds to the immediately following plan year. This new rule is retroactive for the 2020 and 2021 plan years. Note that while the IRS permits these new extension rules, it’s up to employers to decide what they want to do.