How Does Flexible Spending Work?

Flexible Spending Accounts (FSAs) are a beneficial tool for many employees, allowing them to manage their healthcare expenses more efficiently. Understanding how FSAs work can enable individuals to maximize their benefits and manage their out-of-pocket healthcare costs effectively. In this detailed overview, we will explore all the critical aspects of FSAs, how to use them, and their benefits.

Understanding Flexible Spending Accounts

A Flexible Spending Account, or FSA, is a special account you put money into that you use to pay for certain out-of-pocket health care costs. You don’t pay taxes on this money. This means you’ll save an amount equal to taxes you would have paid on the money you set aside. Here’s how it typically works:

• Pre-Tax Contributions: An FSA is funded with pre-tax dollars taken from your salary. This reduces your taxable income because the funds are withdrawn before taxes are applied. For example, if you decide to contribute $2,000 to your FSA for the year, that money comes out of your salary before federal, Social Security, and other applicable taxes are calculated.

• Employer-Sponsored: FSAs are primarily an employer-sponsored benefit, meaning you can typically only open one if your employer offers it. Typically, you’ll choose your contribution amounts during your employer's benefits enrollment period.

• Annual Contribution Limits: The IRS sets limits on how much you can contribute to an FSA each year. For 2023, the maximum limit is $2,850, though this figure can change annually based on IRS updates.

Types of Flexible Spending Accounts

FSAs are versatile and come in different types to serve distinct needs:

1. Healthcare FSA: This is the most common type of FSA and allows you to pay for eligible medical, dental, and vision expenses with pre-tax dollars. Eligible expenses can include deductibles, copayments, prescription medications, and non-cosmetic medical procedures.

2. Dependent Care FSA: This account is used to pay for eligible expenses related to care for dependents while you work. This includes expenses like daycare, before and after school programs, and elder care. The maximum contribution limit may differ from that of healthcare FSAs, set at $5,000 per household or $2,500 if married and filing separately.

3. Limited Purpose FSA: These accounts are often associated with high deductible health plans (HDHPs) and are limited to certain expenses, typically dental and vision. This allows you to pair it with a Health Savings Account (HSA).

Key Features of FSAs

"Use-It-or-Lose-It" Rule

One of the most important aspects of an FSA is the "use-it-or-lose-it" rule. This means the funds you contribute in a calendar year must be used by the end of the year, or you forfeit the remaining balance. However, some employers offer options to mitigate this rule:

• Grace Period: Some employers may provide a grace period of up to 2.5 months into the new year, allowing additional time to use last year's FSA contributions.

• Carryover Option: Alternatively, employers might offer a carryover option, permitting employees to carry over up to $570 of unused funds to the next plan year.

Eligible Expenses

It is crucial to understand which expenses can be reimbursed from an FSA. Here are some common examples:

• Medical expenses such as doctor visits, surgeries, and hospital stays.
• Prescription medications and over-the-counter drugs (with a doctor’s prescription).
• Medical equipment (e.g., crutches, blood sugar monitors).
• Dental treatments, including cleanings and orthodontia.
• Vision care, such as glasses and contact lenses.

Quick Eligibility Check Table

Steps to Using an FSA

Navigating how to use an FSA can seem confusing, but here’s a step-by-step guide to help you manage it effectively:

1. Choose Your Contributions Carefully: During your open enrollment, decide how much money you want to allocate to your FSA based on your expected healthcare expenses.

2. Submit Eligible Expenses for Reimbursement: Keep track of medical receipts and submit claims to your FSA administrator for reimbursement. Many plans offer debit cards to pay directly for eligible expenses.

3. Monitor Your Funds: Regularly check your FSA balance to ensure you’re on track to use all the funds before the year ends or the deadline of the grace period.

4. Plan for Year-End: If you have remaining funds and don’t have a carryover option, plan to use them on eligible expenses before they expire.

Frequently Asked Questions About FSAs

Can I change my FSA elections mid-year?
Typically, you can only change your FSA elections during open enrollment unless you experience a qualifying life event like marriage, divorce, birth of a child, or change in employment status.

Are FSAs portable?
No, FSAs are not portable. If you leave your job, you lose access to your FSA unless you elect COBRA to continue contributions on a post-tax basis.

Can I have both an HSA and an FSA?
Yes, but typically only if you have a Limited Purpose FSA, which covers specific dental and vision expenses, allowing you to maintain an HSA for broader healthcare spending.

What happens to my FSA if I don't use all the money?
You risk forfeiting any unused funds at the end of the plan year—or after the grace period or carryover option—due to the "use-it-or-lose-it" rule.

Making the Most of Your FSA

To maximize the benefits of an FSA, consider:

• Forecasting Medical Expenses: Estimate upcoming expenses like planned surgeries or new glasses to set your contributions appropriately.

• Regularly Checking Approved Expenses: Stay informed on what qualifies as an eligible expense, as rules and lists can change each year.

• Strategic Spending: During the year, manage your health purchases to ensure you effectively use your contributions without leaving money forfeited.

FSAs provide a valuable opportunity to save money on eligible healthcare and dependent care expenses. By understanding how to navigate their rules and strategically managing your contributions and spending, you can achieve significant savings in your healthcare expenditures. Explore more on utilizing FSAs and surrounding benefits to ensure comprehensive healthcare planning.