Be ready: What is a Flexible Spending Account (FSA), and how can it help you?

Part of our “Be Ready” series of articles exploring workplace benefits — and how they can help you be better financially prepared when the unexpected happens. 

Taking care of yourself and your family is important, but the costs involved in doing so can really add up — especially when you consider all the out-of-pocket expenses that your health insurance doesn’t cover. Copays for doctor visits and ER visits, deductibles, dental care, prescription medications, glasses, child care — it can all take a bite out of your budget and possibly throw you off course as you work toward your financial goals.

What is an FSA — and how can it help me?

While your primary health insurance may cover many of your biggest health-related costs, it’s the kinds of things mentioned above that an FSA has the potential to help you with.

An FSA is a tax-advantaged account, usually offered by employers, that allows you to set aside money each month to help pay for eligible health or dependent care expenses insurance doesn’t cover. The money you put into an FSA comes out of your check pre-tax, so it could also help reduce your taxable income.¹ And when you’re ready to spend some of those funds, many FSAs offer a debit card you can use at the time of service or at the point of sale, so you can use the funds directly from your account.

FSAs come in three flavors

1. Health FSA

This kind of FSA is for eligible medical, dental and vision expenses, and it covers the broadest range of eligible expenses² within the three types of FSAs. Examples include:

• copays
• deductibles
• prescription medications
• insulin
• glasses
• dental and orthodontia services
• certain over-the-counter medications, such as paid relief drugs or cold and flu medicine
• chiropractors
• everyday essentials in your medicine cabinet, such as skin care, first aid, period products and more

Something really useful about Health FSAs is that while the amount you’ve chosen to contribute is taken in equal amounts from each paycheck over the year, on the first day of the plan year, you’ll have immediate access to the entire amount. Another important thing to note is that you cannot contribute to a Health FSA and a Health Savings Account (HSA) at the same time.

Do you need to enroll in a medical plan to have an FSA?

No, your participation isn’t tied to enrollment in a medical plan like it is with an HSA. Employees who are eligible for benefits may enroll in the Health FSA when their employer is offering it as an option. You’re not required to enroll in your company’s medical plan to participate in the Health FSA. You can, for example, be covered on a spouse’s or parent’s medical plan and elect to participate in your company’s Health FSA.

Also, family members don’t have to be enrolled in a participating employee’s medical plan to incur qualified expenses that you can reimburse from your Health FSA. Under federal tax law, qualified expenses can be incurred by:

1. you
2. your spouse
3. your tax dependents
4. your children up to age 26

This expansive list of enrolled family members can be a two-edged sword, though. Yes, more family members’ qualified expenses can be reimbursed tax-free. But if you have a Health FSA, you may disqualify your spouse or adult child from opening and funding a Health Savings Account — even if your spouse or child never reimburses a qualified expense from your Health FSA.

Check out this Health FSA calculator to plan your savings amount and understand how much you might save in taxes.¹
 

2. Limited Purpose FSA

This is similar to a Health FSA, except that eligible expenses² are limited to dental and vision expenses only. Examples include:

• dental office copays
• braces and orthodontia
• dentures and bridges
• eye exams
• prescription glasses and contact lenses
• Lasik eye surgery

Limited Purpose FSAs are like Health FSAs when it comes to accessing your funds: Even though your contribution will be taken over the course of the year, on the first day of the plan year, you’ll have immediate access to the entire amount. But a Limited Purpose FSA is different than a Health FSA in one important way: A Limited Purpose FSA allows you to be enrolled in an HSA at the same time. In fact, you could choose to use the funds in your Limited Purpose FSA to pay for eligible dental or vision expenses, instead of your HSA, to help you keep the money in your HSA for future use.

3. Dependent Care FSA

This FSA can be used for eligible dependent care expenses incurred while you are participating in the plan. This includes such things as care while you work or attend school, like daycare, before- and after-school care or summer day camps for kids under age 13, as well as care for tax dependents of any age who reside in your home (such as those needing adult day care services). Examples² include:

• work-related babysitting
• after-school care
• preschool
• adult day programs or in-home care

Please note that unlike Health and Limited Purpose FSAs, a Dependent Care FSA does not give you access to all your funds right away. You can only use the amount of money that you’ve contributed up to that point.

Keep your receipts.

While many FSAs give you a debit card you can use to pay for eligible expenses, some will require you to pay for the expenses from your own pocket and then submit a claim for reimbursement — which means you need your receipt. But even if you use a debit card, you may still be asked to substantiate your expenses, which means you’ll need — you guessed it — your receipt. Please note that unlike Health and Limited Purpose FSAs, a Dependent Care FSA does not give you access to all your funds right away. You can only use the amount of money that you’ve contributed up to that point.

How can I enroll in an FSA?

As mentioned above, FSAs are generally offered through your employer benefits. You can usually enroll when you start a new job and make your other benefits selections, or after that during your employer’s annual enrollment period. If you have a qualifying life event, such as a new baby or adoption, you may also be able to enroll then. Check with your HR team for details on your company’s specific policies.

How much can I contribute to an FSA? And how do I fund it?

The IRS sets yearly limits for HSA contributions, and these may change year to year. As far as contributing goes, after you’ve decided how much money you want to go into your FSA, that amount will be divided by how many pay periods there are in the year. Then, each payday, your contribution will be deducted from your paycheck, pre-tax, in equal amounts.

How many FSAs can I have?

Families can have two or more Health FSAs. A family isn’t limited to one Health FSA. In fact, neither is an employee. When a family with two working adults has high qualified expenses (think about vision-correction surgery, restorative dental services or high-price prescription drugs), both spouses can participate in their employers’ Health FSAs (even if they work for the same company). They can each elect up to the maximum set by each employer and within IRS guidelines — even if they both work for the same company.

Keep in mind: If you don’t use your FSA funds, you’ll lose them

No matter which kind of FSA you choose, they’re all what’s known as “use it or lose it” accounts. That means you’ll lose any funds you haven’t spent by the end of the plan year. For example, if you have $300 you still haven’t spent when the new plan year starts, you’ll lose that money — it does NOT typically carry over to the new year. So you’ll want to carefully estimate your costs at the beginning of the year to help ensure you’re able to spend every cent of your hard-earned money.

There is an asterisk, of course: Some employer plans may have plans that allow you to roll over a portion of your funds into the next year. Or they may give you a grace period so that you have a bit more time to use those funds. Check with your employer to see how the FSAs they offer work in this regard.

The combination of tax savings and cash-flow benefits makes FSAs a benefit that you may wish to consider during open enrollment.

Check with your HR department to find out if you can enroll in an FSA during your employer’s next open enrollment period.