When it comes to healthcare, things are often complicated. What professionals who work at an insurance agency, hospital, or in your doctor’s office learn over the course of years of experience, you’re expected to know as common knowledge.
While this isn’t realistic, it’s true that the more you know, the better. As it relates to your healthcare plan, you can make wiser choices when you understand your options. One of those options might be a Flexible Spending Account (FSA), or Flexible Spending Arrangement.
If you’re wondering, “what is a flexible spending account?” you’re not alone. Here, we’ll explain this beneficial tool and how it works.
What is an FSA?
An FSA, as its name suggests, is a flexible spending account that you can use to pay for a variety of healthcare costs including copayments, deductibles, certain drugs, and more.
An FSA can help you save and budget for health care costs, so you’re able to afford them when necessary. But that’s not the only benefit. Funds you put into an FSA are tax-free, thus reducing your tax liability on the amount you contribute.
How does a flexible spending account work?
Here’s a breakdown of how flexible spending accounts work:
First, you need to sign up for an FSA through your employer. Then, you can decide how much you want to contribute to your FSA that year and your employer will then deduct your contribution in increments from your paycheck with each pay period. In some cases, your employer may contribute to your FSA as well. Currently, you can contribute up to a max of $2,850 per year per employer.
When you incur an out-of-pocket medical expense, you then submit a claim to your FSA through your employer. Along with your claim, you’ll need to submit proof of the expense, as well as proof that your insurance doesn’t cover it. Once your claim is approved, you’ll receive reimbursement for your out-of-pocket costs.
In other cases, your employer may provide you with a debit card, credit card, or stored value card that can be used for FSA eligible costs.
It’s important to note that you can receive the maximum amount of reimbursement (the amount you elected to contribute for the year) at any time during the coverage period, regardless of the amount you have actually contributed. For example, say you elect to contribute $2000 to your FSA at the beginning of your plan year. If you incur out-of-pocket expenses in February of the year that total $1200, but you’ve only contributed $200 to your FSA so far, you are still eligible to be reimbursed for the full $1200!
Do flexible spending accounts roll over?
Flexible spending accounts are meant to be used during the plan year. However, your employer may allow you to roll over some of the funds, or extend you a grace period to use the funds. If they allow rollovers, you can carry over up to $570 per year. If they allow grace periods, you have up to two and a half months to use the funds from the previous year.
Your employer doesn’t have to offer either of these options, and they can only offer one of them. So it’s important to check with your specific FSA plan before counting on being able to roll over some of your funds.
Because rollovers aren’t guaranteed and you only have a limited amount of funds able to be rolled over or a short grace period, it’s important to only contribute as much to your flexible spending account as you plan to use. While many healthcare expenses are unpredictable, others are not. This is especially true if you have a chronic condition or take regular medication.
If this is the case, use past receipts to forecast future costs, and contribute to your account accordingly.
What does FSA eligible mean?
FSA eligible refers to health care costs that are eligible for reimbursement by your FSA. Generally, FSA eligible items are those that qualify for the medical and dental expenses deduction on your tax return. A complete list of qualified expenses will be available in your plan.
FSA eligible items
FSA eligible items include certain medical and dental expenses for you, your spouse if you’re married, and your dependents. The expenses could be for:
- Copayments
- Deductibles
- Prescription medications
- Over-the-counter medicines with a doctor’s prescription
- Insulin
- Medical equipment like crutches
- Supplies like bandages
- Diagnostic devices like blood sugar test kits
Costs that are not eligible to be reimbursed by your FSA include health insurance premiums, and long-term care coverage costs or expenses.
What is dependent care FSA?
A Dependent Care FSA (DCFSA) is a flexible spending account that can be used to pay for eligible dependent care services, such as preschool, summer day camp, before or after school programs, and daycare for children under 13. Care for adult dependents who are unable to care for themselves is also eligible.
Similar to a regular FSA, and one of the reasons why it can be beneficial, you contribute to a DFSCA with pre-tax dollars and can use the funds tax-free. This could save you hundreds of dollars in taxes each year.
Also similar to a regular FSA, you can open a dependent care FSA through your employer during open enrollment. However, you can contribute more to a DCFSA than an FSA, up to $5,000 per household per year. For many parents, it’s all too easy to spend at least that much on childcare services in a given year. However, if you estimate your child care costs will be less, only contribute up to that number. Otherwise, like FSA funds, you will lose what money you don’t use.
Unlike FSAs, you can only access money from your DCFSA that you have already contributed from your paychecks.
HSA vs FSA
A Health Savings Account (HSA) is different than a Flexible Spending Account, although there are some similarities between the two. HSAs offer another way to save and pay for health care costs and contributions to HSAs are also tax-free and deductible from your taxable income. Key differences between an HSA and an FSA, however, include:
- The contributions roll over year over year and remain in your account until you use them
- The funds you contribute to an HSA can be invested, and the earnings from investments are tax-free
- You can keep your HSA if you leave your employer
Questions about FSAs?
If you’re curious if you have access to a flexible spending account for health care, dependant care, or both, reach out to your company’s HR department and ask. They will be able to answer your question and help you set up your FSA if it’s an optional benefit.
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