How Does a Flexible Spending Account (FSA) Work?

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This is a continuation of our recent series about all things FSAs. If you need to get caught up, check out What is an FSA and What are the Benefits of an FSA? Let us show you the easiest way to get started with an FSA (Flexible Spending Account).

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This is a continuation of our recent series about all things FSAs. If you need to get caught up, check out What is an FSA and What are the Benefits of an FSA? Let us show you the easiest way to get started with an FSA (Flexible Spending Account).

Flexible Spending Account (FSA) 101

An FSA or Flexible Spending Account is a pre-tax health account (sometimes referred to as a medical FSA or health FSA)  that can be used to pay for eligible healthcare expenses.

In more technical terms, a Flexible Spending Account is provided by employers and gives eligible employees a tax-free account to save money for expected qualifying health expenses. Using an FSA can reduce your applicable income taxes and save you money on predicted health expenses. Unlike an HSA, FSAs have a “Use it of Lose it” provision. FSAs must be used within the same plan year or the individual forfeits all remaining money (please note there are two exceptions to this rule including a grace period and carry-over provision). Additionally, you need to elect how much you want to contribute into your account at the beginning of every plan year – we know, not the easiest thing to do.

How to Add Money to your Flexible Spending Account (FSA)

Once you have opened a Flexible Spending Account, you can add your contribution amounts. Please note, contribution limits are set annually by the IRS. In 2017, FSA contribution limits are $2,600 for individuals. Unlike an HSA there are no family contributions. However, both spouses or partners can have individual FSAs eligible for $2,600 each. Here are the ways you can contribute:
  • Payroll Contributions – This is the most common way to contribute to your FSA. As we noted above, you are only able to elect how much to contribute at the beginning of each year, so plan ahead! You are only able to change the contribution amount if and only if there is an employment status change or a qualifying event (marriage, divorce, or the birth of a child). Changes must be made within 30 days of that event.
  • Employer contribution – Employers can make match contributions to your FSA in addition to your individual contributions. Employer contributions match the individual contribution limits set annually. Employers may contribute an additional $2,600 for 2017 for a maximum of $5200 per individual FSA account. There are some complexities here (for example what an employer can match if the employee contributes less than $500 dollars). See full details here.

How to Use your Flexible Spending Account (FSA)

  • Debit card – most FSA companies provide individuals with a debit card to easily pay for qualified health expenses like doctors visits, prescriptions, etc.
  • Receipt upload/reimbursement – if you make a purchase without your FSA debit card, you can reimburse yourself for the out-of-pocket expenses. Make sure you keep that receipt!

The Last, But Most Important FSA Tip

FSAs are best to use for expected qualified health expenses. Do your best to plan each year and review your expected expenses to ensure you can maximize the tax savings and not forfeit money at year end. The “Use it or Lose It” provision of an FSA makes it less flexible than other health accounts, but still a great tool for yearly health savings.

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.