June 15, 2020
Potential COVID-19 Impacts on Health Flexible Spending
Arrangements (FSAs) and Recent Health FSA Changes
Health flexible spending arrangements (FSAs) are an
27 at the end of the tax year. Qualified medical expenses
optional benefit employers may offer that allow their
generally include amounts paid for “the diagnosis, cure,
employees to set aside money, on a tax-advantaged basis, to
mitigation, treatment, or prevention of disease, or for the
pay for certain out-of-pocket medical expenses. The rules
purpose of affecting any structure or function of the body,”
of such arrangements may affect an individual’s ability to
as well as certain transportation and lodging expenditures.
use or modify their FSA in light of the Coronavirus Disease
They do not include health insurance premiums, long-term
2019 (COVID-19) pandemic and corresponding recession.
care insurance premiums or expenses, amounts covered
under another health plan, and expenses for any medical
This product provides a brief overview of health FSAs and
care that the employer has precluded from reimbursement.
some potential ways that the COVID-19 pandemic may
affect individuals with such arrangements. It concludes with
When offered as a cafeteria plan benefit, health FSAs are
a description of recent COVID-19-related executive branch
generally subject to cafeteria plan rules. One such rule is a
and congressional activity around health FSAs.
“use-or-lose” rule that prevents any cafeteria plan benefit
from providing “deferred compensation.” As such, health
Health FSAs are one type of health-related, tax-advantaged
FSA plans have only a limited ability to permit unused
account/arrangement and are one type of flexible spending
health FSA balances to be used after the end of the plan
arrangement. As such, some health FSA rules are different
year. In general, employers must incorporate one of three
than the rules for other health-related tax-advantaged
mutually exclusive policies for the treatment of an
accounts/arrangements (e.g., health savings accounts
employee’s unused health FSA balances at plan year’s end:
[HSAs]) and other FSA types (e.g., dependent care FSA).
1. employees forfeit unused balances;
2. employees have a grace period for
Health FSAs are generally offered by employers through a
additional claims of up to 2½ months
, which allows employees to reduce their
after the end of the plan year (e.g.,
taxable salary and instead put such money, pre-tax, toward
medical expenses incurred by March 15,
a qualified benefit. Participation in a health FSA is tied to a
2021, could be reimbursed from FSA
set period of time (plan year
), which generally lasts 12
contributions from a January-December
months and does not need to follow the calendar year. Plan
2020 plan year); or
years are associated with the year in which the plan starts
3. employees may carry-over a limited
(e.g., a health FSA with a plan year that begins in July 2020
amount of unused health FSA funds into
follows 2020 health FSA rules).
the next FSA plan year (up to $500 in
2019 plan year contributions and $550 in
When FSAs are funded through a cafeteria plan, employees
2020 plan year contributions).
elect an annual amount to contribute to their FSA prior to
the start of a plan year, which generally cannot be changed
To the extent that an individual has a health FSA balance
during the plan year except for limited circumstances (e.g.,
after the end of the grace period or has a balance that
change in family status). The employee then contributes
exceeds the allowable carry-over amount (where
amounts to the FSA over the course of the plan year that
applicable), such amounts are forfeited to the employer.
would total to the elected amount. The maximum amount
that an employee can contribute to a health FSA is $2,750
Since health FSAs are generally only available to current
in 2020. Employers may also provide limited contributions.
employees of employers offering such benefit, if an
employee is terminated, they may forfeit their FSA balance.
The total health FSA election amount must be made
In some instances, individuals may be able to retain access
available to employees at the start of the plan year, even
to their health FSA through Consolidated Omnibus Budget
though the contributions are typically spread throughout the
Reconciliation Act of 1985 (COBRA) continuation
year. For example, an employee who elects to contribute
coverage. Inversely, if an employee is terminated mid-plan
$2,400 to his/her health FSA for a given plan year ($200 a
year having withdrawn more money than contributed, they
month) would be able to access all $2,400 on the first day
generally cannot be charged for the negative balance.
of the plan year (even if he/she has only contributed $200).
Potential COVID-19 Impacts
Employees can generally only use health FSAs to reimburse
As designed, health FSAs provide limited ways that
the qualifying medical expenses
of the employee, his/her
individuals can account for unexpected medical costs or
spouse and dependents, and his/her children younger than
changes in medical care availability. Individuals determine
Potential COVID-19 Impacts on Health Flexible Spending Arrangements (FSAs) and Recent Health FSA Changes
the amount of contributions prior to the plan year, generally
Executive Branch Activity
cannot change such amount during the plan year, and may
In May, the Internal Revenue Service provided employers
only carry-over limited amounts into future plan years (if at
with the ability to offer two types of temporary flexibilities.
all). Considering this structure and the recency of the
COVID-19 pandemic and corresponding recession, many
Employers may provide employees with the ability to make
individuals may have determined how much to contribute to
prospective, midyear changes (during calendar year 2020)
their FSA without factoring in changes in the medical care
to the amount the employee contributes to his/her health
that would be needed or accessible during the COVID-19
FSA. Such changes include allowing employees to increase
pandemic. This would be particularly relevant for those
or decrease the amount contributed to an FSA, revoke an
individuals currently enrolled in a health FSA that began
election to an FSA, or decide to start contributing to an
prior to the detection of COVID-19. As such, the COVID-
FSA. In Example 2
above, the employer could allow the
19 pandemic may have unexpectedly increased the
employee to make additional midyear contributions to
probability that individuals over- or underfunded their
replenish the health FSA, up to the 2019 annual limit.
health FSAs relative to prior years. Examples of this impact
can be demonstrated in the following three situations:
If an employer decides to offer such midyear changes, the
employer may provide only a subset of the aforementioned
Each example assumes a July 1, 2019-June 30, 2020 health
midyear changes and generally may determine the extent to
FSA plan year and that the plan allows for a $500 carry-
which such changes are permitted. For example, an
over to the subsequent plan year beginning on July 1, 2020.
employer is allowed to limit the time frame that such
These examples are based on the law and regulations as
election may be made and may prevent health FSA
they existed on January 1, 2020, and do not account for
contributions from being reduced below amounts that have
subsequent congressional and executive branch activity
already been withdrawn from the FSA.
responding to these potential impacts (discussed in the
In addition, employers that offer health FSAs with plan
years (or grace periods) that end in 2020 may extend the
An employee decided to contribute $1,200 to an
time frame in which employees may access such funds
employer’s health FSA to help pay for a nonemergency
through December 31, 2020. Using Example 1
procedure the employee anticipated having in March 2020.
employer could allow the employee to use any remaining
As a result of the COVID-19 pandemic, the nonemergency
balances available at the end of June 2020 for medical
procedure was postponed to the end of 2020. If the
expenses incurred through December 31, 2020. If any
employee does not have any other medical expenses over
balances remain after December 31, 2020, the employee
the course of the health FSA plan year beginning in 2019,
could subsequently carry-over up to $500 in funds to the
then $500 will roll over to the plan year beginning in 2020,
July 2020-June 2021 plan year (per the terms of the plan).
and the remaining $700 would be forfeited.
Not all health FSAs may be eligible to benefit from the
Another employee also decided to contribute
December 31, 2020, extension flexibility. For example, a
$1,200 to an employer’s health FSA to help pay for a
health FSA that goes from November 1, 2019, through
nonemergency procedure. In this instance, the employee
October 31, 2020, and provides a 2½-month grace period
had the procedure in August 2019 and applied all $1,200 in
would not benefit from the extension since the plan already
the health FSA to the nonemergency procedure. This
allows employees to utilize those FSA amounts through the
employee was subsequently diagnosed with COVID-19 in
first half of January 2021.
April 2020 and does not have any funds left in his/her
health FSA to help cover the cost of treatment. As such, the
employee will need to wait until he/she can elect a new
The Coronavirus Aid, Relief, and Economic Security Act
health FSA contribution for the subsequent plan year (i.e.,
(CARES Act; P.L. 116-136) permanently expanded the list
July 1, 2020) and new funds become available for costs
of health FSA qualified medical expenses to include,
incurred during that plan year.
beginning in 2020, over-the-counter medicines and drugs
(without a prescription) and menstrual care products.
Another employee decided to contribute $1,200
to an employer’s health FSA. As a result of the economic
Congress may determine that the COVID-19 pandemic
effects of the COVID-19 pandemic, the employee stopped
warrants further modifications to health FSAs and may
working for this employer in April before utilizing any
decide to provide additional temporary or permanent
funds. The employee forfeited his/her FSA balance unless
flexibilities. Such changes could include further modifying
the employer was obligated to offer, and the employee
the treatment of unused health FSA balances, how
enrolled in, health FSA COBRA continuation coverage.
terminated employees access health FSAs, or other health
FSA rules (e.g., §§20151, 20154, 20155, and 20156 of the
Recent FSA Changes
HEROES Act, H.R. 6800).
In response to the potential impacts caused by the COVID-
19 pandemic, both the Administration and Congress have
Ryan J. Rosso
, Analyst in Health Care Financing
taken steps to provide flexibilities to individuals with FSAs.
Specifically, employers have been allowed to provide
flexibilities regarding certain FSA rules and the list of items
considered qualified medical expenses has been expanded.
Potential COVID-19 Impacts on Health Flexible Spending Arrangements (FSAs) and Recent Health FSA Changes
This document was prepared by the Congressional Research Service (CRS). CRS serves as nonpartisan shared staff to
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