If you receive healthcare coverage through your employer, you might have heard of an FSA. Or a Flexible Spending Account. These accounts allow you to earmark funds for eligible out-of-pocket medical expenses. As a bonus, they can also help you reduce your taxes.
Let’s take a look at what a Healthcare Flexible Spending Account (HCFSA) does. And why you may want to consider using one.
What is a Healthcare FSA (HCFSA)?
When it comes to paying for healthcare, there’s one thing that most of us can agree on: it doesn’t come cheap. Whether we’re talking about regular preventative care, the occasional X-ray, or a severe condition, the out-of-pocket expenses can feel like a burden for many Americans.
Luckily, a little bit of relief can be found in the form of a Healthcare Flexible Spending Account, or HCFSA.
Healthcare FSAs are a type of spending account offered by employers. Pre-tax dollars are put aside from your paycheck into your FSA. Your employer may also choose to contribute. Later, you can use this money to pay for qualified expenses, such as medical care, health-related products, and other services.
Because your funds are contributed from your payroll to the FSA, they are pre-tax. This means that you can wind up saving up to 30% on medical products and services. Compared to if you'd paid those bills with after-tax dollars, depending on your tax bracket.
Some employers offer to contribute to their employees’ FSAs, though they aren’t required to do so. But if your workplace benefits package includes FSA contributions, you’re in luck.
First, that "free" money means less that you have to put toward your medical expenses each year. Second, your employer's contributions won’t count toward your annual FSA contribution limits.
Basic Healthcare FSA Rules
There are a few things to remember when it comes to establishing — and then spending from — your Healthcare FSA.
- Annual contribution limits: These annual limits for FSAs are set each year by the IRS. If you're married and both you and your spouse have an FSA, you can each contribute up to the yearly maximum in each of your accounts. If only one of you has an FSA, you cannot double your contributions.
- Eligibility: You are eligible to contribute to an FSA if your employer offers one. The Healthcare FSA doesn't need to be paired with a specific health insurance plan, either. You have the flexibility to choose the best insurance plan for your family. While still benefiting from tax-advantaged healthcare savings.
- When the funds expire: You must use your FSA money within the plan year or risk forfeiting what's remaining. If there's a balance at the end of the year, your employer may offer options. The IRS sets how much you can rollover each year, if your employer allows it. Or your employer may give you an extra 2.5 months grace period, during which you can use the leftover money. But you cannot do both. If you accept an employer's offer to rollover funds, that balance won't affect your contribution limits for the following year.
- How to fund your FSA: During open enrollment, you will choose how much you’d like to contribute to your FSA. Then, your employer makes payroll deductions and deposits the money into your FSA. Your employer may also choose to make extra contributions to your FSA.
- How to use your FSA: You will pay for eligible healthcare expenses as usual, out of your pocket. Then, you will submit the proper documentation to your plan administrator for reimbursement. This reimbursement can come from a mailed paper check or direct deposit into your bank account.
What Healthcare FSAs Can Cover
You can use a Healthcare FSA to cover any number of health and wellness expenses. Including those involved with your medical, dental, or vision care. Here are some of the eligible expenses for which you can use your FSA funds:
- Over-the-counter and prescription drugs. Such as pain relievers, allergy treatments, insulin, birth control pills, sunscreen, ointments, and more.
- Medical supplies and equipment. Such as crutches, wheelchairs, bandages, contact lenses, dentures, breast pumps, and more.
- Diagnostic devices, such as blood sugar kits
- Therapeutic services, like chiropractic adjustments and acupuncture
Your FSA funds don't have to be used exclusively by you, either. That includes your spouse and dependents—specifically, children who will be younger than 27 at the end of the calendar year. And parents who are in your full-time care.
Setting Your FSA Contributions
FSA contribution amounts are set-up during open enrollment each year. After that, you can only change the amount you contribute to your FSA after a Qualifying Life Event (QLE):
- Gain a new family member, such as a spouse or dependent child (birth, adoption, or placement for adoption).
- Take on an eligible tax-exempt dependent. This could happen if a parent moves into your home, or you’re appointed the guardian of a minor.
- Have lost coverage under your spouse’s FSA due to death, job loss, or divorce.
- Lose a dependent, either due to death or the dependent "aging out” of eligibility.
- Are affected by a change in your spouse’s employment status
None of these apply to you? Then you'll need to wait until the next open enrollment period to make changes to your FSA.
What If You Also Have an HSA?
Like FSAs, Health Savings Accounts (HSAs) offer tax- advantages for healthcare expenses. To open an HSA, though, you must first be enrolled in a High-Deductible Health Plan (HDHP).
If you have an HSA, you can continue to use the money from that account to pay for eligible medical expenses, just as you would with your FSA funds. However, you can not contribute to an HSA while you're also contributing to a Healthcare FSA.
Contributing to an HSA and an FSA
You can own both an HSA and a Healthcare FSA, and spend from each account simultaneously. The caveat, though, is that you can only contribute to one of these accounts at a time. So if you want to contribute to an HSA while also building FSA funds, you’ll need to do so through a Limited Purpose FSA. Rather than a Healthcare FSA.
A Limited Purpose FSA is similar to a Healthcare FSA in that it acts as a tax-advantaged spending account for health-related expenses. One big difference between the two is that a Limited Purpose FSA can only be used to cover eligible dental and vision expenses. Another key difference is that you can contribute to a Limited Purpose FSA and an HSA simultaneously.
Spending from an HSA and an FSA
When you have both an HSA and an FSA, you'll want to strategize your healthcare-related spending. That's because your HSA money rolls over each year and can be saved for as long as you need it. Because of this, many people use their HSA as an extra retirement account.
Since you lose any remaining FSA money at the end of each year, it makes sense to spend that money first. In doing so, you can preserve your HSA forever (or at least until you need it). Plus, the savings will continue to earn interest over time.
You'll still be able to cover eligible medical expenses with tax-advantaged funds. By using your FSA funds before your HSA funds, though, you'll optimize both.
The Bottom Line
FSAs are an incredibly beneficial product that helps you allocate funds for upcoming healthcare expenses. By allowing you to utilize pre-tax funds for these eligible expenses, FSAs also save you money when compared to paying with after-tax dollars. As time-sensitive funds, HCFSAs can be used first to cover healthcare costs. This saves HSA savings (which don’t expire) for the future.
Healthcare FSAs can also help relieve the burden that many feel when it comes to paying for medical- and wellness-related expenses. Once established — especially if your employer also contributes to the account— they provide secure and dedicated funds that you can use throughout the year. Knowing that this money is there can help ease stress if a situation does arise.
If you are offered a healthcare FSA through your job, consider the many benefits this account can provide. Talk to your company's HR department to learn more about opening up a healthcare FSA.
Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.