The recently enacted $2 trillion stimulus law aimed at providing financial assistance during the coronavirus outbreak also includes a key change on how health savings accounts and flexible spending accounts can be used.
The Coronavirus Aid, Recover and Economic Stabilization Act, or CARES Act for short, reverses an Affordable Care Act rule that barred policyholders from using funds in HSAs and FSAs to pay for over-the-counter (OTC) medications.
HSAs and FSAs allow people to set aside pre-tax funds for medical costs, medical out-of-pocket and copays, as well as for the cost of pharmaceuticals. The moneys in these funds are usually deposited from the employee's paycheck before taxes, thereby reducing their tax burden.
HSAs are usually attached to high-deductible health plans, while FSAs can be used in conjunction with any employer-sponsored health plan.
For 2020, contribution limits to HSAs are $3,550 for individual coverage and $7,100 for family coverage.
Unlike FSAs, HSA owners can allow their funds to carry over from one year to the next, so their contributions and the interest accrues tax-free.
You can withdraw money from an HSA tax-free if it's used for qualified medical expenses. You can find a list of these expenses on the IRS's website (your HSA provider should also be able to provide you with a list).
For the 2020 calendar year, an individual can contribute up to $2,750 to a health care FSA.
If employers provide health care FSA contributions, this amount is in addition to the amount that employees can elect. Employees can elect up to the IRS limit and still receive the employer contribution on top of what they contribute themselves.
If employers have adopted a $500 rollover for the health care FSA, any amount that rolls over into the new plan year does not affect the maximum limit that employees can contribute.
The ACA rule was relaxed by the CARES Act due to the coronavirus outbreak, so that people can use their FSA funds to pay for OTC medications like pain relievers, anti-inflammatories and other medicines that don't require a prescription.
While the coronavirus led Congress to permanently overturn the Obamacare restriction on OTC medications, other parts of the CARES Act reforms could vanish once the pandemic ends. For example, it only temporarily allows insurers and employers to cover telemedicine if employees haven't met their deductibles.