IRA, COBRA, DCAP. When it comes to benefits, there is no shortage of acronyms.
As an employee, there’s one of these acronyms employees certainly should know about: FSA, short for Flexible Spending Account. Also sometimes referred to as a flexible spending arrangement, an FSA is an employer-sponsored account into which employees put money to pay for some out-of-pocket medical, vision and dental expenses. A key advantage is that you’re not required to pay taxes on FSA funds.
Unlike Health Savings Accounts (HSAs), which are tied to high-deductible health plans, FSAs can be offered along with any type of employer-sponsored group health plan except for those from the Health Insurance Marketplace. Employers can make contributions to your FSA and match your deposits up to $500 — but they are in no way required to do so.
In some cases, individuals with an HSA can select a limited-purpose FSA (LP-FSA). The difference? These accounts are only for use toward vision and dental expenses.
There is a limit to how much you can contribute to an FSA every year. As mentioned in our “FSAs, HSAs and HRAs in 2023: New Rules for the New Year” blog, the IRS has increased the contribution limit on FSAs for 2023. The inflation-adjusted amount will allow you to put more tax-free dollars toward qualified healthcare items.
Use-It-Or-Lose-It
There is a catch, though. If you don’t use the money you set aside in your FSA by the annual deadline set by your employer — the standard is December 31 of the year you make the contributions — you forfeit what’s left. Your employer gets to keep any unused funds to offset the costs of administering the program’s benefits during the plan year. Some employers divide the unused funds among employees enrolled in an FSA.
Some employers allow their employees to carry over FSA funds into the following calendar year. The limit this year is $570.
Your employer also has the option to provide a grace period of up to two and one-half extra months for you to spend your FSA contributions. They can offer one of these options — but not both — and aren’t required to do either. According to the Employee Benefit Research Institute, approximately one-third of employers provide the average grace period to spend the money, and 42 percent allow employees to roll over the limited amount to the next year.
More often than not, employees do not to use all their FSA funds. About half of FSA account holders in the U.S.forfeit some or all of their contributed funds each year. Another note: if you switch to another job with another company, your FSA contributions won’t move with you.
Funds For You and Your Family
Married? Have kids? You might be surprised to learn that your FSA funds can also be utilized to pay for certain medical and dental expenses for you, your spouse and any dependents you claim on your tax return. That includes any adult children on your health insurance plan that will be 26 or younger on Dec. 31 of the year you enroll. An added bonus? It doesn’t matter if they’re already enrolled in another type of health insurance.
If you have a child under 13 who attends daycare, preschool, an after-school program or some other type of non-employer-sponsored child care program, you’re in luck. You can invest in a dependent care FSA (DC-FSA) pre-tax benefit account to pay for these types of programs. The only catch is that your 13-or-under child must reside with you for more than half the year and be incapable of self-care.
Although not as common, DC-FSA funds can be used to cover care costs for children over age 13 with special needs and elderly parents or relatives whom you claim as dependents on your taxes. In these cases, the adult must live with the FSA enrollee for at least eight hours of the day.
Products and Services for Purchase
Now, let’s get down to the nitty-gritty. What kinds of products and services can you purchase through your FSA? Here’s just a sample:
● Deductibles and copayments
● Prescription and over-the-counter (OTC) medications
● Addiction treatment
● Acupuncture
● Doctor and dentist appointments
● Pregnancy tests
● Menstrual supplies
● Some medical supplies and devices (e.g.,, bandages, crutches, blood sugar test kits)
The IRS offers a list of medical and dental expenses permitted as FSA purchases. You can also confirm eligible expenses with your FSA administrator. The products and services must be bought in the same year as the FSA claim.
Whatever you purchase through your FSA, utilizing those pre-tax funds for medical products and services lowers your bottom line by enabling you to reduce your taxable income. Plus, exceptfor DC-FSA participants, you don’t have to file any additional forms at tax time.
Easy Steps for FSA Enrollment
Enrolling in an FSA with your employer is fairly easy. Know that contributions are set during open enrollment, which often occurs in the fall. It’s at this time most employers also allow their workers to pick a new health plan or make other changes to their benefit plan.
As Healthcare.gov explains, once you submit a claim to the FSA (through your employer) with proof of the medical expense and a statement that it hasn't been covered by your plan, you’ll get reimbursed for your expenses. It’s also common for employers to provide you with a debit card to pay for FSA expenses as you go. A few extra tips to ensure you get the most out of your FSA:
● Ask your employer about how to use your specific FSA.
● Know your FSA balance.
● Save your receipts.
● Proactively schedule necessary vision and dental appointments.
● Get any shots, vaccines or immunizations you may need.
● Check your FSA claim deadline before the end of the year.
● Use your FSA primarily to pay for expenses not covered by your health plan.
● Renew prescriptions regularly.
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