HSAs and FSAs: Rolling into 2022 – TheStreet

By Cary Tucker, CFP

With the transition from 2021 to 2022, some changes are now in effect for health savings account (HSA) and flexible spending arrangement (FSA) accounts. For 2022, the IRS has increased the HSA contribution limit by $50 for individuals (from $3,600 to $3,650) and by $100 for families (from $7,200 to $7,300). Likewise for 2022, the IRS has increased the health FSA contribution limit by $100 (from $2,750 to $2,850).

However, for HSA and FSA accounts, some rules for 2021 will stay the same in 2022. For HSA owners age fifty-five or older, the additional catch-up contribution will remain at $1,000 for 2022.

Also remaining in place for 2022 are the exceptions to a the simple “use-it-or-lose-it” FSA plan. Rather than employees rushing to use up FSA savings before the end of the year, the employer may offer one of two exceptions — either a grace period or a carryover. In the past, the carryover amount was limited to $500, and the grace period was limited to two and a half months. With the COVID-19 pandemic though, under the Consolidated Appropriations Act, the IRS has expanded the rules considerably, granting more flexibility to employers regarding the carryover and the grace period.

If the employer offers an FSA with a carryover, the employer can allow all unused funds — not just $500 — from a plan year ending in 2021 to be carried over to 2022. If the employer offers an FSA with a grace period, the employer can allow unused benefits from a plan year ending in 2021 to be extended up until the end of 2022 — for twelve months rather than just two and a half months. Of course, you will need to check with your own employer as to the amount of any carryover and the time for any grace period.

Given ongoing medical costs and the tax advantages of an FSA and especially of an HSA, wouldn’t it be nice to make contributions to both an FSA and to an HSA? According to IRS Publication 969, even if you are covered under a high deductible health plan, you generally cannot contribute to an FSA and HSA in the same year, except under special arrangements such as a limited-purpose health FSA. With one of my previous employers, for example, besides contributing to an HSA, I was also able to contribute to a health FSA that was limited to covering expenses only for vision care and dental care.

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As tempting as it is to contribute to both an FSA and an HSA, there may be a catch. The IRS has previously issued a memorandum (Number 201413005) indicating that a health FSA with a carryover feature can affect the eligibility to contribute to an HSA. If your health FSA from 2021 has money left over that has carried into 2022, your HSA contributions for 2022 may be limited — even if you are not also signed up for a health FSA in 2022. For any year where you have carried over FSA funds, please check with your human resources department or an appropriate expert to determine if the carryover of your health FSA from last year will restrict your HSA contributions in the present year.

But what if you don’t have the option to contribute to both am HSA and a health FSA? What if you must choose either one or the other? While there are tax savings with HSA and with FSA contributions, financial advisors like to tout the triple tax advantage of the HSA. Not only are HSA contributions deductible, but investment growth within the HSA is tax free, and qualified withdrawals from the HSA are also tax free. Moreover, unlike the limited “use-it-or-lose-it” duration of FSA cash, the savings in a HSA can be rolled over from year to year.

But, there’s a catch. Early withdrawals (before age 59½) from a traditional IRA carry a 10% penalty. However, there is also a penalty for unqualified withdrawals (before age 65) from an HSA. In order to avoid taxes and penalties, withdrawals from an HSA must be used for qualified medical expenses. (A detailed list of what expenses qualify is provided in IRS Publication 502.) However, if you are under age sixty-five and you take a withdrawal from your HSA that is not used for a qualified medical expense, not only do you have to pay income taxes on the withdrawal, but you also are required to pay a 20% penalty. In other words, with an HSA, the price to triple the tax advantage is to double the withdrawal penalty. Therefore, unless you are over age sixty-five in 2022, please be especially careful that all your HSA withdrawals are used only for qualified medical expenses.

About the author: Cary W. Tucker, CFP®

Cary W. Tucker, CFP®, is a former paralegal who transformed into a paraplanner. With an estate planning background and over a dozen years of experience in the financial services industry, Cary enjoys providing solutions for financial health.

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