Unlike Health Savings Accounts (HSAs), which have to be used on healthcare-related expenses, FSAs come in a couple of different “flavors.” One option for an FSA is to use it for medical expenses while another option is for dependent-care expenses. The medical expense accounts can be for all medical expenses, or they can be defined as limited-use, meaning they can only be used for dental and/or vision care expenses.
So what are these accounts? What are their benefits, and should you use one through your employer? Here’s everything you need to know.
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An FSA is an employer-sponsored plan, typically part of a broader cafeteria plan of benefits. Unlike a Health Savings Account, you can’t go and set one up independently of your employer. They have to offer it as a benefit in order for you to take advantage. The money that goes into your account is taken from your paycheck before taxes are, so you save tax money up front.
Typically, you contribute to the account per-paycheck throughout the year. You can then spend the money on qualified expenses, which vary depending on the type of account you have. We’ll talk below about how to use these FSA funds in a practical manner.
One caveat: These funds are often “use them or lose them.” That means, if you don’t use the money by the end of the year, it is gone. Starting in 2014, these rules changed slightly. Before, all FSAs were a use it or lose it proposition, which could get frustrating. Now, only dependent-care accounts are always use it or lose it.
Your employer can decide to offer a carryover grace period of up to 2.5 months, which can allow you to spend into the next calendar year without losing your FSA balance. Grace period lengths vary, but, often, the claim deadline is March 31st. Another option is that an employer can allow you to carry over up to $500 of unused funds, which can be used as part of the next year’s FSA.
Still, unlike with an HSA, you cannot carry over all of your balance indefinitely. So, it’s essential to be careful about how much you choose to contribute to this account during the open enrollment period.
Funding an FSA
As noted above, FSAs are typically funded from your paycheck. If your employer offers an FSA, you’ll get the option to sign up during open enrollment. You can typically elect an annual amount to contribute, which your employer will then divide over each paycheck. Or, you might decide on a per-paycheck contribution that fits within your monthly budget.
Withdrawing from an FSA
Depending on your flex account plan and administration, you’ll have a couple of different options for withdrawing money from your FSA for eligible expenses. You’ll want to talk with your administrator to find out how this will work for you. Here are the most common options:
Debit/Check: Some accounts come with a debit card or book of checks attached to the account, so you can spend straight from the FSA for allowed expenses. This is a convenient option, for sure. However, the card may not always work because it will restrict where you can spend and which items you can spend on, according to your plan’s limits. Also, many daycare providers are unable to take debit cards, so this may not work for your dependent care account.
Reimbursement: Typically, this is at least one option with any FSA, but with some, it’s the only option. With some accounts, you may need to spend out-of-pocket and file a receipt for reimbursement with your plan administrator. They’ll usually send either a direct deposit to your personal checking account or a check in the mail. This can take two weeks or more, so if you’re on a tight budget, this can be difficult to manage.
See also: List of Free Checking Account Options
For instance, when my daughter was small, we used a flexible spending account for dependent care expenses. It was a great way to save money on taxes (and, usually, an FSA will net more overall tax benefits than the Dependent Care Tax Credit). However, we were living on a very tight budget, so using the account became difficult.
My husband, the primary breadwinner, had $190 set to come out of every paycheck to be deposited into the FSA. This reduced his take-home pay enough that it was difficult for us to turn around and write a check to the daycare provider. We’d have to wait a couple of weeks after filing our receipt to get the reimbursement, so in the meantime, finances were tight.
The FSA was still worthwhile for us, but it took some time to get use to this paycheck withdrawal-daycare payment-reimbursement rhythm. Keep this in mind if you’re planning to use an FSA on regular expenses without access to a debit card tied to your account.
Types of FSAs
Most companies will offer only two types of FSAs: medical expense and dependent care. However, there are several “flavors” of these limited-use accounts, which may be an option depending on your company. The main options include:
1. General-purpose medical expense account: This is probably the most common type of FSA, and it’s common with employers whose healthcare plans don’t qualify for the more-beneficial HSA. The money contributed to a general-purpose health FSA can cover any eligible medical expenses, including dental and vision expenses.
2. Limited-used medical expense account: This type of FSA is often offered by companies who also offer an HSA. These accounts can be used only for dental- and vision-related expenses. Because of this, they don’t count as a non-qualified health plan for the purposes of using an HSA, so you can use this option in tandem with an HSA.
3. Dependent-care account: As you’ve likely gathered from the above illustration about my own FSA experience, one “flavor” of FSA is a dependent-care account. Money contributed to this account can be used for daycare, before- and after-school care, and other eligible childcare expenses for children in your household who are under the age of 13. Older children with special-needs and special-needs adults who live with you may also be included.
4. Commuting and parking account: If you travel often for your job, your employer may offer a commuting account, and if you have to pay for parking for work, you may also qualify for parking benefits. As with dependent-care and certain medical expenses, you can often write off these expenses at the end of the year. But, an FSA for these purposes lets you net tax benefits right away.
5. Adoption assistance account: This is perhaps the most unusual type of FSA, but some employers offer it. It’s an account that allows you to save funds specifically for adoption, either domestic or international.
How Much Can You Contribute?
As with other tax-free savings account options, the IRS sets limits on what can be contributed to an FSA annually. In 2016, the contribution limits are as follows:
Flexible Spending Account Contribution Limits, 2016
Note that with some of these accounts, such as the adoption assistance account and dependent care account, there’s an income-based phase-out that changes annually. If you’re a six-figure earner, double check with your account administrator to see if you’ll be phased out on the contribution limits for any of these accounts.
How Much Should You Contribute?
Knowing the limits for FSAs doesn’t mean you automatically know how much you should contribute. Because these accounts don’t always roll over their full leftover balance like HSAs do (and never roll over their full balance), you definitely don’t want to contribute too much. It’s better to shoot short and make up the rest of your savings by claiming your out-of-pocket expenses when you file your taxes.
Check with your plan administrator during open enrollment, though, as some of these plans will allow you to roll over a limited amount of funding to the next year.
Then, consider carefully how much you’ll actually spend in these areas. Looking back through last year’s expenses is a good start, especially for relatively steady expenses like dependent care. Of course, this won’t give you the complete picture, and you’ll need to do some estimating.
Again, you’ll want to shoot low if your employer or account type doesn’t allow for rollover. If you have the $500 rollover option, you can add that $500 back into your calculations once you’ve made them. It’ll be there if you need it this year, or you can carry it over to the next year, if needed.
Spending deadlines for FSAs vary, depending on how your plan administrator has set up the plan. Employers have three options for spending deadlines:
- All expenses must be incurred by December 31st.
- All expenses must be incurred by December 31st, but users can roll up to $500 into the next year’s FSA.
- All expenses must be incurred by March 15th.
Be sure to check with your plan administrator on the deadlines for your FSA. If you have multiple accounts, like a dependent-care account and a medical-use account, be sure to ensure that the deadlines match. They may not, depending on how your employer has chosen to set up the plans.
Keep in mind, though, that spending deadlines and reporting deadlines don’t necessarily match. Often times, you’ll have a few weeks past your spending deadline to actually file the FSA claim.
For instance, an account with a December 31st spending deadline may have a submission deadline of January 15th. And, typically, plans with a March 15th spending deadline have a March 31st submission deadline.
So say, for instance, that you want to run out your medical FSA by the end of the year. So you decide to pick up some medical supplies, like bandages, to stock your first aid cabinet for the next year on December 31st. If your account spending deadline is December 31st, you’ll have to turn the receipts into your account administrator by January 15th.
Spending Down Your Account
When you use an FSA, it’s primarily important that you choose how much to contribute to your account wisely. But you may still not spend all the contributed funds within a year on prescriptions and routine medical work.
If that’s the case, keep in mind that you can spend down your account on other medical expenses near the end of the year, including:
- Acupuncture treatment and chiropractic care
- Bandages and other medical supplies
- Body scans
- Breast pumps and supplies
- Necessary home modifications
- Contact lenses and eye contacts
- Dental treatment
- Diagnostic devices
- Fertility enhancements
- Hearing aids
- Insurance premiums
- Lead-based paint removal
- Advance payments for lifetime care
- Long-term care insurance premiums
- Psychological services
- Special education for a child with disabilities
- Sterilization, including vasectomy
- Physical therapy
- Weight-loss program to treat a medical diagnosis
As you can see, you’ve actually got several options for spending down your FSA before your plan’s deadline. The key is to plan ahead even for expenses like these, and to be sure you thoroughly understand the options for claims before you make them.
For instance, claiming home improvements if you become wheelchair bound is allowed, but it’s also quite complicated. You’ll want to talk with an expert before claiming large expenses like these, even if the goal is to spend down your account.
One Note: FSAs with HSAs
When deciding whether or not to use an FSA, especially for medical purposes, it’s essential that you understand how they play with your other benefits and the benefits offered by your spouse’s employer.
Here’s one example: My husband and I are on separate employer-sponsored healthcare plans. His qualifies for an HSA, but mine does not. My employer, however, offers an FSA. After doing some serious research, I decided not to use the medical FSA option this year because it would disqualify my husband from using an HSA.
You see, FSA and HSA monies can be used on all dependents/spouses, even if they aren’t carried on your healthcare plan. This is convenient for us because it means that my husband’s HSA funds can be used to cover medical expenses for myself and my daughter, though we aren’t on his healthcare plan.
However, it’s inconvenient because my FSA would also count as healthcare coverage for my husband. If I put funds into an FSA – even if I only ever used those funds on my or my daughter’s healthcare expense – it would disqualify him from using an HSA.
It’s confusing, and the rules are intricate. If you’re dealing with multiple accounts, be sure to check with your account administrators to see what the rules are.
This also applies to dependent-care accounts. As you can see from the table above, you can make contributions of $2,500 per employee, or $5,000 as a married couple (or as a single parent). If both you and your spouse have a dependent-care account option, you could each choose to use them, contributing up to $2,500 each into your separate accounts. Or one spouse could use the account, contributing up to $5,000 maximum. Either way, your total contributions must not exceed $5,000.
You can go either way here – two separate accounts or one account that comes out of one spouse’s paycheck. However, be sure to look at administration fees for the accounts. They’re typically low – a couple bucks per paycheck. But, if you put all the funds into one account and pay administration fees only once, you might save a few dollars per year.
The rules surrounding flexible spending accounts are nuanced and complicated. But if this is an option with your employer, you should have a conversation with your benefits administrator. See how your account options will work best in your favor, how much they could save you on your taxes, and how they’ll work with your spouse’s potential benefits. Then, take time to figure out your contribution amounts so that they make sense. If you do, a FSA account could be a grea way to net some tax benefits in the coming year.