Financial Planning

Health Savings Accounts Get Even Better

A health savings account is a powerful, tax-advantaged tool to cover out-of-pocket medical expenses and a smart way to save for medical expenses in retirement. New rules in 2020 let HSAs and flexible spending accounts (FSAs) cover even more of your health expenses.

As the country dealt with the fallout from the coronavirus pandemic this spring, lawmakers and regulators scrambled to ease the pain of record job losses and other blows to Americans’ pocketbooks and health. One result that has largely flown under the radar: Health savings accounts and flexible spending accounts, which offer a tax-advantaged way to save money for certain medical or dependent-care expenses, have become more generous. Some of the changes are temporary, but others have no expiration.

More expenses are covered. Thanks to the Coronavirus Aid, Relief and Economic Security (CARES) Act, you can use money from an HSA or a health care FSA to pay more expenses—and these changes are permanent. Over-the-counter drugs purchased January 1, 2020, or later are now HSA- and FSA-eligible without a prescription. Those include pain relievers, cough suppressants, anti­histamines and other drugs that treat issues from heartburn to acne, says Shobin Uralil, cofounder and chief operating officer of Lively, an HSA provider. Feminine-hygiene products such as tampons, pads and menstrual cups are also qualifying expenses under the law.

Other new rules give a high-deductible health plan paired with an HSA the green light to cover certain expenses you incur as a result of the pandemic before you meet your deductible. One such expense is telehealth, through which patients and clinicians consult remotely over the phone or by using a video chat tool, such as FaceTime. Telehealth services have been on the rise now that social distancing is encouraged — and high-deductible plans with plan years that start on or before December 31, 2021, are permitted to cover the services even if you haven’t reached your deductible. High-deductible plans may also pay for testing and treatment related to COVID-19 before you’ve reached your deductible. If a corona­virus vaccine becomes available, receiving one would be considered preventive care and may be excluded from your deductible, too.

A health savings account is a powerful tool to cover out-of-pocket medical expenses: Contributions are pretax (or tax-deductible, if your HSA is not employer-sponsored), the funds grow tax-deferred in the account, and withdrawals are tax-free for qualified medical expenses, without a time limit. An HSA is a smart way to save for medical expenses in retirement, too. The money in your account can grow over time through investments, and “it can be the best tax-sheltering account of them all,” says Dennis Nolte, a certified financial planner in Winter Park, Fla.

If you had an HSA through an employer-sponsored plan and you lost your job, the account is yours to keep, and you can still use the funds anytime, tax-free, for qualified medical expenses. Although health insurance premiums are typically not considered qualified medical expenses, there’s an exception if you use withdrawals to pay premiums for COBRA coverage (which lets you continue employer-based insurance for up to 18 months after you leave your job) or to pay for other health insurance premiums if you’re collecting unemployment benefits.

FSAs are even more flexible. FSAs allow employees to set aside pretax money for certain health care or dependent-care expenses, but they come with more limitations than HSAs. While you’re employed, you have only until the end of your plan year to use the funds, or until March 15 if your employer offers a grace period. Alternatively, you may be permitted to roll up to $500 of your unused balance in a health care FSA to the following plan year. If you lose your job, you may have up to 90 days from termination (depending on your former employer’s rules) to submit receipts for expenses you incurred while you were still employed. But you can’t make claims for expenses incurred after you lost your job—unless you get COBRA continuation coverage for your FSA.

To help those who are dealing with pay cuts, fluctuating expenses or other unexpected effects of the pandemic, the IRS is allowing certain midyear changes to employee health insurance benefits and FSAs that are typically permitted only during open enrollment or when a worker has a qualifying life event, such as the birth of a child or a marriage. Employers are not required to offer these midyear plan adjustments, and a little more than half say they aren’t planning to do so, according to a survey by benefits consultant Mercer. But 43% said they will let workers alter contributions to a dependent-care FSA, and 29% will permit contribution changes to a health care FSA.

Depending on what your employer offers, you may be able to start setting aside funds in an FSA or stop contributing to one that you currently have. Or you may have the option of raising or lowering the amount that you put into your current plan. What’s more, for 2020 plans, employers may increase the amount of unused funds that can be carried over to the following year to $550 (that does not apply to 2019 funds carried into 2020). Companies may also extend the grace period from March 15 until the end of the year. So an employer may, for example, let employees use funds from their 2019 FSAs through the end of 2020.

Money stashed in a dependent-care FSA may be used to pay for child or adult day care; a babysitter or nanny; preschool; before- and after-school programs; and summer day camp. The ability to modify contributions to these accounts midyear could be especially beneficial for parents who set aside funds in a dependent-care FSA but have had lower child-care expenses than expected during the pandemic—for example, because child-care centers were closed or a summer camp was canceled. The changes could also be a big help for those who are saving in a health care FSA—for example, because a planned medical procedure was delayed as a result of the pandemic.

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