Is a Flexible Spending Account Right for You?
Find out everything you need to know about FSAs
Does your new benefits package include an FSA? But, wait, what does FSA stand for? This financial benefit is a Flexible Spending Arrangement. If you’re already feeling overwhelmed by basic healthcare related terms such as In-Network, HDHP, HSA, co-pays and deductibles don’t worry. In this article we’ll help you unpack the FSA, aka the flexible spending account. You’ll learn what this account is, how it works, all the benefits of an FSA and if it’s the right product for your needs.
What Is an FSA?
An FSA, more commonly known as a flexible spending account, is an employer-sponsored and tax-advantaged account in which employees deposit a portion of their salary to pay for qualified expenses. These accounts were created as part of the Internal Revenue Code Section 125.
They are essentially savings accounts that must be used to pay for out-of-pocket healthcare costs. However, there is a special FSA subtype called a Dependent Care Flexible Spend Account (DCFSA), the funds in which are meant to cover childcare or qualifying dependent adults’ care expenses.
FSAs are only accessible through your employer, who can also contribute as an additional benefit, although they’re not legally required to do so. Any amount saved in your FSA account is non-taxable money, which means it doesn’t count toward your taxable income. Therefore, FSAs are tax-free from the first dollar. The money is then used to reimburse you for payments for qualified expenses. The FSA limit of contributions is established by the IRS and gets revised yearly to adjust for inflation and cost of living.
How Does an FSA Work ?
Once you decide to enroll in your employer’s flexible spending account, you have to sign up during the annual open enrollment period, which takes place once a year, usually around November-December. This is the time in which you’ll have to pick the total amount destined for your FSA for the year, although that figure will then be split into monthly contributions taken from your paycheck. As established by the IRS, “you can use an FSA to pay qualified medical expenses even if you haven’t yet placed the funds in the account”, so from day one you have the account. Wondering “how does dependent care FSA work?”. It’s essentially the same, except that the type of expenses you can fund have to do with specific care services for a dependent.
What Can FSA Be Used for ?
Unless you get a DCFSA, a flexible spending account only covers medical and dental costs for you, your spouse and your dependents. However, these healthcare costs must be meet requirements to qualify for FSA payments.
These include co-pays, deductibles (but not insurance premiums) for medical services or procedures, and specific FSA eligible items. The following are a few examples of medical expenses that can be reimbursed from an FSA:
- ambulance services
- body scans
- bandages
- breast pumps and supplies
- contact lenses
- crutches and wheelchairs
- dental treatments
- eye exams, glasses, and eye surgery
- hearing aids
- nursing home residency and services
- pregnancy tests
- therapy
On the other hand, cosmetic procedures and surgeries, as well as non-essential health products or services, like the following, are not covered:
- gym memberships
- hair removal
- maternity clothes
- nutritional supplements
- teeth whitening
Check out the complete list of FSA eligible items on the IRS website.
Should I Get an FSA?
Keep in mind that a flexible spending account is best suited for people with a low-deductible health plan and a frequent need for healthcare services.
- Families with young kids, who tend to get sick often during the year, and adults with recurrent aches and pains.
- People with chronic conditions, such as diabetes or glaucoma, that require continuous medications and regular medical checkups.
- People that can foresee that they’ll need particular surgeries or medical procedures, such as laser eye surgery, or knee surgeries.
- People anticipating the costs for elderly care.
Do Flex Spending Accounts Roll Over ?
The reason why a flexible spending account is ideal for those that have frequent need for medical attention or products is that the funds don’t roll over like other types of tax-advantaged accounts. They must be used by the end of the year, or the money is almost completely lost. Only approximately $610 is carried over to be used in the following year.
In certain cases, your employer could offer what is called a “grace period”, an extra 2.5 months to consume the funds. However, this is not a mandatory practice.
What Happens to Your FSA After Leaving a Job?
Both in the event that you decide to quit or are terminated, sadly you lose any unused amount in your FSA. The only way to access such funds would be to switch to COBRA continuation coverage of your FSA, if you’re eligible. If you’re thinking about a job or career change anytime soon it might, therefore, be wiser to opt for another type of account or make plans to use up your entire FSA savings before leaving.
However, there’s the other side of the coin to consider too. If you spend the entire amount of your FSA and then quit or retire before the end of the year, your employer is forbidden by law to ask you for that money back.
How Much to Put in an FSA
You’re not allowed to put any amount you want in your FSA. There is a maximum contribution established yearly by the IRS. To avoid having your funds expire unused, choose the right figure to put in your FSA by making the following calculations:
- If your average yearly/monthly out-of-pocket medical and dental expenses match the maximum figure you can contribute to your FSA, you’re probably OK maxing out your account.
- If, on the other hand, the FSA yearly limit is, for example, $3,850, but your average monthly spending only reaches $200, consider only putting in your FSA $2,400 (200x12). This way, you’ll have exactly what you need to cover the year, no more.
The Benefits of an FSA
To sum it up, a flexible spending account essentially has three big advantages:
- It reduces your tax liability. It is estimated that you can save up to 30% by using non-taxable dollars for medical expenses that you were going to have anyway.
- It pays for all your family’s qualified expenses. You, your spouse, and your dependents can all benefit from the money in the account.
- You don’t have to wait to accumulate the funds. If your qualified expenses happen at the beginning of the year, you can access the entire amount needed.
What Is the Difference Between an FSA and HSA?
Maybe you already have a Health Saving Account (HSA), or maybe your employer offers a choice between an HSA and an FSA. Either way, learning what sets these two accounts apart is crucial to understanding which one is best for you. Remember that aside from some very specific exceptions, you cannot contribute to both accounts in the same year.
The HSA and FSA both allow tax-deductible contributions, however, they also have a few important differences:
- While a flexible spending account belongs to and is handled by the employer, an HSA travels with you from job to job.
- To access an HSA, you must be enrolled in a High Deductible Health Plan (HDHP), whereas an FSA is set up independently from your insurance plan.
- Money deposited in an FSA can only be retrieved as reimbursement for specific expenses. In an HSA, on the other hand, withdrawals for any reason other than medical costs are possible at any time, although they are taxed and subjected to a penalty.
- Money accumulated in an HSA is primarily used for medical expenses but can also be invested within the account to grow and rolled over to the following year. FSA contributions must be claimed by the end of the year, otherwise they might be lost.
- In an FSA you must decide the total amount you’re going to deposit at the beginning of the year, even if you’re then going to deposit monthly. In an HSA you can adjust contributions throughout the year.
- Some FSA benefits that an HSA doesn’t provide include the possibility to set up your FSA as a (DCFSA), which provides tax free reimbursement for non-medical costs such as childcare or elderly care. On top of that, a flexible spending account acts like a line of credit, in the sense that you can use the total value from day one, despite not having accumulated the full figure yet. In an HSA you can only redeem what you have already accrued.
Choosing one account over the other is a personal choice that can vary even from one year to another. Take your time to carefully evaluate alongside a professional what’s right for you.
Find a Job with a Flexible Spending Account with Help from Monster
Find an opportunity to save money in an FSA Start out by creating a free candidate profile on Monster. We’ll send you customized job alerts for roles that fit your needs. Plus, we’ll promote your profile to our partner recruiters and companies to help you find the perfect match for your skills and needs.
This article is not intended as a substitute for professional financial advice. Always seek the professional advice of a financial adviser regarding any questions you may have.